Question

Compare Papa John’s and Yum! Brands

The following total liabilities and stockholders’ equity information (in millions) is provided for Papa John’s International, Inc. (PZZA) and Yum! Brands, Inc. (YUM) at the end of a recent year:

		Papa John’s		Yum! Brands
Total assets		$495		$8,075
Total liabilities		444		7,164
Total stockholders’ equity		51		911

Yum! Brands is a much larger company than is Papa John’s; however, both companies compete internationally in the fast food business. Papa John’s is primarily in the carry-out and delivery pizza business, while Yum! Brands is in the quick-service restaurant business with its Pizza Hut, Taco Bell, and KFC brands

a. Compute the ratio of liabilities to stockholders’ equity for each company. (Round to one decimal place.)

Liabilities to stockholders’ equity ratio
Papa John’s		$
Yum! Brands		$

b. If the ratio of liabilities to stockholders’ equity is 3, what does this mean?

1. It means the total liability is 3 times as great as the stockholder's equity.
2. It means the total liability is at least 3 times as great as the number of stocks.
3. It means the stockholder's equity is 3 times as great as the total liability.
4. It means the total liability is 2 times as great as the stockholder's equity.

c. Which company is more risky to creditors?

The ratio of liabilities to stockholders’ equity is, Therefore,   risky to creditors.

Answer 1

a.

Ratio	Formula	Papa John's	Yum! Brands
Liabilities to stockholders' equity	Total liabilities / Total owner's equity	444 / 51	8.7	7,164 / 911	7.9

b.

If liabilities to stockholders' equity is 3 it means that

Numerator (which is the total liabilities) is THREE times the denominator (Stockholders' equity)

Option A is correct

c.

Papa John's is MORE RISKY because it has HIGHER ratio