u are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same dustry. LotsofDebt, Inc. finances its $32.00 million in assets with $30.00 million in debt and $2.00 million in equity. LotsofEquity, Inc. nances its $32.00 million in assets with $200 million in debt and $30.00 million in equity. alculate the debt ratio. (Round your answers to 2 decimal places.) Debt ratio LotsofDebt, Inc. LotsofEquity, Inc. Calculate the equity multiplier. (Round your answers to 2 decimal places.) Equity multiplier LotsofDebt, Inc. times LotsofEquity, Inc. times Calculate the debt-to-equity. (Rour your answers to 2 decimal places.) Debt-to-equity times LotsofDebt, Inc. LotsofEquity, Inc. times
u are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same dustry. LotsofDebt, Inc. finances its $32.00 million in assets with $30.00 million in debt and $2.00 million in equity. LotsofEquity, Inc. nances its $32.00 million in assets with $200 million in debt and $30.00 million in equity. alculate the debt ratio. (Round your answers to 2 decimal places.) Debt ratio LotsofDebt, Inc. LotsofEquity, Inc. Calculate the equity multiplier. (Round your answers to 2 decimal places.) Equity multiplier LotsofDebt, Inc. times LotsofEquity, Inc. times Calculate the debt-to-equity. (Rour your answers to 2 decimal places.) Debt-to-equity times LotsofDebt, Inc. LotsofEquity, Inc. times
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![### Investment Analysis: Understanding Financial Ratios
As part of evaluating a potential stock investment, you are considering two firms: LotsofDebt, Inc. and LotsofEquity, Inc., both operating within the same industry.
**Company Financials:**
- **LotsofDebt, Inc.:** $32.00 million in assets, $30.00 million in debt, $2.00 million in equity.
- **LotsofEquity, Inc.:** $32.00 million in assets, $2.00 million in debt, $30.00 million in equity.
### Financial Ratios and Calculations
#### 1. Debt Ratio
The debt ratio indicates the proportion of a company’s assets that are financed by debt. It is calculated as:
\[ \text{Debt Ratio} = \frac{\text{Total Debt}}{\text{Total Assets}} \]
**Debt Ratio Table** (values to be computed and rounded to 2 decimal places):
- LotsofDebt, Inc.: \[ \%\]
- LotsofEquity, Inc.: \[ \%\]
#### 2. Equity Multiplier
The equity multiplier shows the degree of financial leverage and is calculated as:
\[ \text{Equity Multiplier} = \frac{\text{Total Assets}}{\text{Total Equity}} \]
**Equity Multiplier Table** (values to be computed and rounded to 2 decimal places):
- LotsofDebt, Inc.: \[ \text{times} \]
- LotsofEquity, Inc.: \[ \text{times} \]
#### 3. Debt-to-Equity Ratio
This ratio compares a company’s total liabilities to its shareholder equity and provides insight into what proportion of equity and debt the company is using to finance its assets.
\[ \text{Debt-to-Equity Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}} \]
**Debt-to-Equity Ratio Table** (values to be computed and rounded to 2 decimal places):
- LotsofDebt, Inc.: \[ \text{times} \]
- LotsofEquity, Inc.: \[ \text{times} \]
By analyzing these financial ratios, you can gain insights into the financial health and risk profile of each company, aiding in making an informed investment decision.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F504f9a44-b97f-4fd5-a72d-264d10f13ba2%2F89e17503-ba80-42c8-8b5a-e10d59ee8bd3%2Fcepx5qj_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Investment Analysis: Understanding Financial Ratios
As part of evaluating a potential stock investment, you are considering two firms: LotsofDebt, Inc. and LotsofEquity, Inc., both operating within the same industry.
**Company Financials:**
- **LotsofDebt, Inc.:** $32.00 million in assets, $30.00 million in debt, $2.00 million in equity.
- **LotsofEquity, Inc.:** $32.00 million in assets, $2.00 million in debt, $30.00 million in equity.
### Financial Ratios and Calculations
#### 1. Debt Ratio
The debt ratio indicates the proportion of a company’s assets that are financed by debt. It is calculated as:
\[ \text{Debt Ratio} = \frac{\text{Total Debt}}{\text{Total Assets}} \]
**Debt Ratio Table** (values to be computed and rounded to 2 decimal places):
- LotsofDebt, Inc.: \[ \%\]
- LotsofEquity, Inc.: \[ \%\]
#### 2. Equity Multiplier
The equity multiplier shows the degree of financial leverage and is calculated as:
\[ \text{Equity Multiplier} = \frac{\text{Total Assets}}{\text{Total Equity}} \]
**Equity Multiplier Table** (values to be computed and rounded to 2 decimal places):
- LotsofDebt, Inc.: \[ \text{times} \]
- LotsofEquity, Inc.: \[ \text{times} \]
#### 3. Debt-to-Equity Ratio
This ratio compares a company’s total liabilities to its shareholder equity and provides insight into what proportion of equity and debt the company is using to finance its assets.
\[ \text{Debt-to-Equity Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}} \]
**Debt-to-Equity Ratio Table** (values to be computed and rounded to 2 decimal places):
- LotsofDebt, Inc.: \[ \text{times} \]
- LotsofEquity, Inc.: \[ \text{times} \]
By analyzing these financial ratios, you can gain insights into the financial health and risk profile of each company, aiding in making an informed investment decision.
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