Question

Problem 10-6A Applying the debt-to-equity ratio LO A3 At the end of the current year, the following information is available for both Pulaski Company and Scott Company. Pulaski Company $2,348,000 Scott Company $1,217,000 Total assets Total liabilities Total equity 811,000 1,537,000 505,000 712,000 Required: 1. Compute the debt-to-equity ratios for both companies. 2. Which company has the riskier financing structure? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Compute the debt-to-equity ratios for both companies. Choose Numerator: Choose Denominator: Debt-to-Equity Ratio Pulaski Company 0 Scott Company 0 Required 1 Required 2

Answer 1

1) I Choose Numerator: Total liabilities $811,000 $505,000 Choose Denominator: Total equity $1,537,000 $712,000 Pulasky Company Scott Company Debt-to-Equity ratio 0.53 0.71 I 2) Which company has the riskier financing structure? Scott Company Reason: Higher debt-to-equity ratio implies that the firm employes more debt capital in the business for its business activities. As a result, firm will be subject to financial risk such as periodic interest payment risk and debt repayment risk at the maturity. As Scott Company's debt-to-equity ratio of 0.71 is higher than Pulasky Company's debt-to-equity ratio of 0.53, Scott Company has the riskier financing structure.