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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Debt Management and Short-Term Liquidity Ratios

Magellan Company is an international travel agency providing travel planning services to customers in over 20 Countries. Recently, the travel industry has been experiencing volatility as a result of increases in oil prices. Magellan’s investors have been following its financial information closely to determine its ability to continue as a going concern, Its investors have used the following information to determine financial ratios:

Chapter 12, Problem 62BE, Debt Management and Short-Term Liquidity Ratios Magellan Company is an international travel agency

Required:

Between 20l8 and 20l9, indicate whether Magellan’s debt to equity ratio increased or decreased. Also, indicate whether Magellan’s current ratio increased or decreased. Interpret these ratios.

To determine

Introduction:

Debt-equity ratio is calculated by dividing the total debt of the company to the shareholders fund. It is used to compute the financial leverage of a company.

Current ratio is the ratio of current assets to current liabilities.

To find:

The debt-equity ratio and current ratio of Figgins’ for the year 2018 and 2019 and comparing the results.

Explanation
  • Debt-equity ratio

Debt-equity ratio=Total liabilitiesTotal equity

Total liabilities for 2018 = Long-term liabilities + Current liabilities

= 0 + $2,200

= $2,200

Total liabilities for 2019 = $5,000 + $ 1,500

= $6,500

Debt-equity ratio for 2018=$2,200$3,900

= 0.56: 1

Debt-equity ratio for 2019=$6,500$3,900

= 1

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