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    psmin0314's Avatar
    psmin0314 Posts: 5, Reputation: 1
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    #1

    Feb 28, 2010, 01:20 PM
    Questions about Debt Management Ratios!!
    You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. LotsofDebt, Inc. finances its $50 million in assets with $40 million in debt and $10 million in equity. LotsofEquity, Inc. finances its $50 million in assets with $10 million in debt and $40 million in equity. What are the debt ratio, equity multiplier, and debt-to-equity ratio for the two firms?


    A. LotsofDebt: 80%, 5 times, 4 times, respectively and LotsofEquity: 20%, 1.25 times, 25 times, respectively
    B. LotsofDebt: 20%, 1.25 times, 25 times, respectively and LotsofEquity: 80%, 5 times, 4 times, respectively
    C. LotsofDebt: 80%, 1.25 times, 25 times, respectively and LotsofEquity: 20%, 5 times, 4 times, respectively
    D. LotsofDebt: 20%, 5 times, 4 times, respectively and LotsofEquity: 80%, 1.25 times, 25 times, respectively



    Please help me. I do not understand for this question.


    Thank you.:)
    morgaine300's Avatar
    morgaine300 Posts: 6,561, Reputation: 276
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    #2

    Feb 28, 2010, 11:55 PM

    Debt ratio is debt/assets.
    Equity multiplier is assets/equity.
    Debt to equity is debt/equity.

    Just some plug n chug.
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