You are considering a stock investment in one of two firms (A and B), both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the debt-to-equity ratio for the two firms.
A) Firm A: 9 times; Firm B: 1.11 times
B) Firm A: 19 times; Firm B: .11 times
C) Firm A: 9 times; Firm B: .11 times
D) Firm A: 19 times; Firm B: 1.11 times

Question

Quizplus · Accepted Answer

Debt-to-Equity Ratio = Total Debt/Total Equity

For Firm A, Debt-to-Equity Ratio = 18/2 = 9 times
For Firm B, Debt-to-Equity Ratio = 2/18 = 0.11 times

Therefore, the best choice is C, which shows the correct debt-to-equity ratios for both firms.

You Are Considering a Stock Investment in One of Two