Question

14. Krisle and Kringle's debt-to-total assets ratio is 0.835 (i.e., debt ratio = 83.5%). What is the company's debt- to-equity ratio? (Enter your answer as a ratio rounded to 2 decimal places that is, do not convert to a percent; for example, enter 80/35 = 2.2857 as 2.29). 15. Philips, Inc has a debt ratio of 27.5% and ROE = 13.3%. What is Phillips' ROA? (Enter answer as a percent).

Answer 1

Q14). For Krisle and Kringle's company,

Debt ratio = Debt/Total assets = 0.835

Basic accounting equation is Total assets = liabilities(debt) + equity

So, Debt-to-equity ratio = Debt/(total asset-debt)

Let total asset be $1

So, total debt = $0.835

and Debt-to-equity ratio = Debt/(total asset-debt) = 0.835/(1-0.835) = 5.06

Q15). For Philips,

Debt ratio = Debt / total assets = 27.5%

ROE = NI/equity = 13.3%

ROA = NI/Total assets = (NI/equity)*(equity/asset)

Let total asset be $1

So, total debt = $0.275

So, Equity/total assets = (1-0.275)/1 = 0.725

So, ROA = 13.3*0.725 = 9.64%