Question

a.  What percentage of the firm's assets does the firm finance using debt (liabilities)? b.  If Rogers were to purchase a new warehouse for $1.1 million and finance it entirely with long-term debt, what would be the firm's new debt ratio? Accounts payable $471,000 Notes payable $244,000 Current liabilities $715,000 Long-term debt $1,206,000 Common equity $4,704,000 Total liabilities and equity $6,625,000 PLEASE answer questions a. and b. legibly. Thank you.

Answer 1

Answer a.

Total assets = Total liabilities and equity
Total assets = $6,625,000

Total liabilities = Current liabilities + Long-term debt
Total liabilities = $715,000 + $1,206,000
Total liabilities = $2,121,000

Debt ratio = Total liabilities / Total assets
Debt ratio = $2,121,000 / $6,625,000
Debt ratio = 0.3202 or 32.02%

Answer b.

Rogers purchased a new warehouse for $1.1 million and finance it entirely with long-term debt.

Total assets = $6,625,000 + $1,100,000
Total assets = $7,725,000

Total liabilities = $2,121,000 + $1,100,000
Total liabilities = $3,221,000

Debt ratio = Total liabilities / Total assets
Debt ratio = $3,221,000 / $7,725,000
Debt ratio = 0.4170 or 41.70%