Debt Management Ratios You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. LotsofDebt, Inc. finances its $100 million in assets with $90 million in debt and $10 million in equity. LotsofEquity, Inc. finances its $100 million in assets with $10 million in debt and $90 million in equity. What are the debt ratio, equity multiplier, and debt-to-equity ratio for the two firms?
A) LotsofDebt: 90%, 10 times, 9 times, respectively; and LotsofEquity: 10%, 1.11 times, .1111 times, respectively.
B) LotsofDebt: 10%, 1.11 times, .1111 times, respectively; and LotsofEquity: 90%, 10 times, 9 times, respectively.
C) LotsofDebt: 90%, 1.11 times, .1111 times, respectively; and LotsofEquity: 10%, 10 times, 9 times, respectively.
D) LotsofDebt: 10%, 10 times, 9 times, respectively; and LotsofEquity: 90%, 1.11 times, .1111 times, respectively.

Question

Quizplus · Accepted Answer

LotsofDebt has a debt ratio of 90% ($90M/$100M), an equity multiplier of 10 times ($100M/$10M), and a debt-to-equity ratio of 9 times ($90M/$10M). LotsofEquity has a debt ratio of 10% ($10M/$100M), an equity multiplier of 1.11 times ($100M/$90M), and a debt-to-equity ratio of 0.1111 times ($10M/$90M).

Debt Management Ratios You Are Considering a Stock Investment in One