Chapter 1, Problem 1.8APE

(a)

To determine

Ratio of liabilities to owners’ equity:

This ratio measures the claims of creditors over claims of owners in financing the assets. A lower ratio indicates that the company has good ability to pay off the creditors’ obligations.

Formula of ratio of liabilities to owners’ equity:

$\text{Ratio of liabilities to owners’ equity =}\frac{\text{ Total liabilities}}{\text{Total owners’ equity}}$

To determine: Ratio of liabilities to stockholders’ equity of Company M.

(b)

To determine

Whether the creditor’s risk of Company M has increased or decreased from December 31, 2015 to December 31, 2016