Question

Ratio of Liabilities to Stockholders' Equity

The Craft Bin, a major competitor of The Building Store in the home improvement business, operates over 1,600 stores. Craft Bin recently reported the following balance sheet data (in millions):

	Year 2		Year 1
Total assets	$30,192		$25,245
Total liabilities	15,392		11,745

a. Determine the total stockholders' equity at the end of Years 2 and 1.

Year 2	$ 14,800 million
Year 1	$13,500 million

b. Determine the ratio of liabilities to stockholders' equity for Year 2 and Year 1. Round your answers to two decimal places.

Year 2
Year 1

c. Based on (b), which is true regarding the risk to the creditors?
_________________ (increased, decreased, or no change)

d. The Building Store, Inc., is the world's largest home improvement retailer and one of the largest retailers in the United States based on net sales volume. The Building Store operates over 2,200 Building stores that sell a wide assortment of building materials and home improvement and lawn and garden products.

The Building Store reported the following balance sheet data (in millions)

	Year 2		Year 1
Total assets	$26,688		$22,932
Total stockholders' equity	13,900		12,600

For Year 2, the creditors of which company are more at risk?
The Craft Bin

Answer 1

• All working forms part of the answer
• Amounts in $ are in ‘millions’
• Requirement ‘a’

[Already completed by you]

Working		Year 2	Year 1
A	Total Assets	$                         30,192.00	$                                       25,245.00
B	Total Liabilities	$                         15,392.00	$                                       11,745.00
C = A- B	Total Stockholders' Equity	$                         14,800.00	$                                       13,500.00

• Requirement ‘b’

		Year 2	Year 1
A	Total Liabilities	$                         15,392.00	$                                       11,745.00
B	Total Stockholders' Equity	$                         14,800.00	$                                       13,500.00
	Ratio of Liabilities to Equity	1.04	0.87

• Requirement ‘c’

The Risk of Creditors has INCREASED in Year 2 over Year 1. This is because in Year 2, Liabilities have increased to $ 1.04 for every $1 of Equity.

• Requirement ‘d’

Working: Calculation of Total Liabilities

               

Working		Year 2	Year 1
A	Total Assets	$                         26,688.00	$                                       22,932.00
B	Total Stockholders' Equity	$                         13,900.00	$                                       12,600.00
C = A- B	Total Liabilities	$                         12,788.00	$                                       10,332.00

Calculation of Liabilities to Equity Ratio

		Year 2	Year 1
A	Total Liabilities	$                         12,788.00	$                                       10,332.00
B	Total Stockholders' Equity	$                         13,900.00	$                                       12,600.00
	Ratio of Liabilities to Equity	0.92	0.82

Answer: Since the Total Liabilities to Equity Ratio in Year 2 of the company “Craft Bin” is MORE than the ratio calculated above of ‘Building Store Inc,, the creditors of The Craft Bin are more at Risk.

Answer = The Craft Bin.