Question

Homework Saved Help Save & Exit Submit Check my work Company Drvorks Expenses Total Assets $22,000 $40,000 67,000 150.000 12.000 68,000 Net Income Total Liabilities $19.000 $ 30,000 27,000 147.000 5.000 17.000 Universal a. Compute the debt ratio for each of the three companies. (Round your answers to 2 decimal places.) Debt Ratio Company Dreamworks Universal b. Which company has the most financial leverage? Largest financial leverage

Answer 1

a. Calculation of Debt Ratio for three companies:

Debt Ratio= Total Liabilities/Total Assets

Dream works = 30000/40000=0.75

Pixar = 147000/150000=0.98

Universal = 17000/68000=0.25

The debt ratio of 0.5 is often considered to be less risky. The ratio above 0.6 is generally considered to be poor ratio sincethere is a risk that the business will not generate enough cash flow to service its debt. The lower the debt ratio the lower will be the risk for the company. Thus Universal company has lower debt when compared to other two companies.

b. Pixar company has largest financial leverage because high debt relative to share holders equity. They measure the ability of company to pay its debts. High debt ratio indicates more financing is done from creditors rather than investor financing. Lower debt or equity ratio implies more financially stable company.