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?

Question

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

Debt Management Ratios You Are Considering a Stock Investment in One