(a)
Concept Introduction:
Debt ratio: Debt ratio measures the percentage of shares financed by debt, the higher debt ratio is considered riskier for the business, because a higher debt ratio indicates a larger portion of assets are funded by external debt, it is computed as total liabilities divided by the total of assets.
The HD’s Debt ratio.
(b)
Concept Introduction:
Debt ratio:
Debt ratio measures the percentage of shares financed by debt, the higher debt ratio is considered riskier for the business, because higher debt ratio indicates a larger portion of assets are funded by external debt, it is computed as total liabilities divided by the total of assets.
The risky ness of the company when compared with the competitor’s debt ratio.
Want to see the full answer?
Check out a sample textbook solutionChapter 2 Solutions
FINANCIAL AND MANAGERIAL ACCOUNTING
- Company X is competing with company Y. These are their ratios: x y Debt Ratio = .437 Debt Ratio = .599 Debt Equity Ratio = .453 Debt Equity Ratio = .965 Interest Earned = 15.854 Interest Earned = 5.67 Based on Long-Term Debt paying ability, are any of them doing well? which company is doing better?arrow_forwardThe Ashwood Company has a long-term debt ratio of 0.50 and a current ratio of 1.60. Current liabilities are $970, sales are $5,175, profit margin is 9.80 percent, and ROE is 17.60 percent. What is the amount of the firm's net fixed assets? Hint: This is another complex problem that requires a number of steps. Remember that CA + NFA=TA. So, if you find CA and TA, then you can solve for NFA Helpful Equations: Long-term debt ratio - LTD/(LTD + TE) CR-CA/CL PM-NI / Sales ROE-NI/TE O $3,851.53 O $3,601.92 O $5,181.07 O $6.733.07 O $2.881.53arrow_forwardK-Life financial services Limited uses risk-adjusted return on capital (RAROC) to measure performance on several aspects. In this regard, imagine that an investment officer wants to execute a transaction with the following characteristics: Probability of default (PD) = 30 basis points Loss given default (LGD) = 55% Exposure at default (EAD) = K 1.45 million Expected loss (EL) = K 2,750 This is a loan to a company in the Agro industrial. The firm’s economic capital (EC) model is based on the 99% confidence level, with an average standard deviation of 2.15%. The risk-free rate of return is 6%. Assume that the bank has set a RAROC hurdle rate of 15% and this transaction has a net profit of K10, 500. REQUIRED: Compute the K-life’s risk-adjusted rate of return on this transaction. Now assume that K-life could also have made a loan for the same amount to a firm in the service industry, and that the standard deviation for economic capital purposes in this case is 1.29%. Compute the bank’s…arrow_forward
- Gates Appliances has a return-on-assets (investment) ratio of 20 percent. a. If the debt-to-total-assets ratio is 25 percent, what is the return on equity? (Input your answer as a percent rounded to 2 decima) places.) b. If the firm had no debt, what would the return-on-equity ratio be? (Input your answer as a percent rounded to 2 decimal places.)arrow_forwardDuPont system of analysis Use the following financial information for AT&T and Verizon to conduct a DuPont system of analysis for each company. Sales Earnings available for common stockholders Total assets Stockholders' equity a. Which company has the higher net profit margin? Higher asset turnover? b. Which company has the higher ROA? The higher ROE? c. Which company has the higher financial leverage multiplier? a. Net profit margin (Round to three decimal places.) AT&T Net profit margin AT&T $164,000 13,333 403,921 201,934 Verizon Verizon $126,280 13,608 244,280 24,232arrow_forwardAssuming Target’s industry had an average current ratio of 1.0 and an average debtto equity ratio of 2.5, comment on Target’s liquidity and long-term solvency.arrow_forward
- Give typing answer with explanation and conclusion If the company were to borrow more (or less), how would that impact the cost of debt and the WACC? Provide a specific assumed example. Weight of Equity 76.10% Weight of Debt 23.90% Cost of Equity 6.98% Cost of Debt 2.55% Tax Rate WACC 5.92%arrow_forwardYou have the following ratios for a firm you're analyzing: Working capital / total assets = 0.7 Retained earnings / total assets = 0.3 EBIT / total assets = 0.2 market value of equity / book value of LT debt = 1.3 sales / total assets = 0.4 Calculate the firm's Z-score. Enterarrow_forwardThe activity ratios measure which of the following? Select one: O a the efficiency of the company's supply chain O b. the efficiency with which a company generates sales from its assets Oc the profitability of the company's activities Od the production efficiency of a company's fixed assets If the assumption of financial distress costs is added, then Modigliani and Miller (with taxes) predicts that the optimal capital structure is 100% debt Select one: O True O Falsearrow_forward
- You calculate that a firm has a total asset turnover of 0.12 and a profit margin of 0.92. If the firm reports that its ROE for the same time period is equal to 0.26, what must be the firms debt-to-equity ratio? Answer as a decimal (not percentage) to two decimal places.arrow_forwardCompany 1 has return on assets of 8.2% and a debt to equity ratio of 67.2%. Company 2 has return on assets of 6.3% and a debt to equity ratio of 53.4%. Based on these ratios, what is generally true about these two companies?a. Company 1 has lower profitability and higher risk. b. Company 1 has higher profitability and higher risk. c. Company 1 has lower profitability and lower risk. d. Company 1 has higher profitability and lower risk.arrow_forwardCompany A's simple EPS is $1 and diluted EPS is $.50. Company B's simple EPS is $1.5 but his diluted EPS is $.25. What would this tell you about the company? Next, suppose Company A's debt to equity ratio is 2 and Company's B's debt to equity ratio is .5. What would this tell you about the company? Besides profitability, what would the measures about tell you about how the company raises money?arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT