Chapter 2, Problem 3.3AA

a.

To determine

Debt ratio:

Debt ratios are expressed to determine the company’s ability to pay off its entire liabilities through the resources that it owns. It means that this ratio will determine the future solvency of the company.

Requirement 1

To compute:

The debt ratio of S for the current year and the prior year.

b.

To determine

Financial leverage:

Financial leverage refers to the company’s obligations on the company’s assets. The more the financial leverage of an entity, the greater will be the risk for the company for future sustainability. As more financial leverage attracts more fixed costs, it is always advisable for every company to check for its financial leverage to be under the controllable level.

Requirement 2

Whether S’s financial leverage increased or decreased in the current year.

c.

To determine

Financial leverage:

The more the financial leverage of an entity, the greater will be the risk for the company for future sustainability. As more financial leverage attracts more fixed costs, it is always advisable for every company to check for its financial leverage to be under the controllable level. The companies with more leverage will be less attracted in the eyes of the investors as it will prove to be a risky investment in terms of payment of interest and repayment of capital.

Requirement 3

Whether S is more or less risky than A and G in terms of debt ratio.