Chapter 1, Problem 1ADM

a)

To determine

Ratio of liabilities to stockholders' equity: Ratio of liabilities to stockholders' equity shows the relationship between the liabilities and the owner's equity. This ratio measures the claims of creditors over the claims of owners in financing the assets. A lower ratio indicates that the company has good ability to pay off the creditors’ obligations.

$\begin{array}{l}\text{Ratio of liabilities to}\\ \text{stockholders' equity}\end{array}\}\text{=}\frac{\text{Total Liabilities}}{\text{Total Owner's Equity}}$

To Compute: The ratio of liabilities to stockholders' equity of Company A and Company B.

b)

To determine

To derive: A conclusion regarding the margin of protection to the creditors from the ratio of liabilities to stockholders' equity of Company A and Company B.