Question

A firm has total assets of $1.930,000 and stockholders equity is $612,000. What is the debt to total asset ratio? (Round your answer to the nearest whole percent.) Multiple Choice O O 84% 68% O a None of the items

Answer 1

1. From the problem we get, Total assets = $ 19,30,000; Stockholder's equity = $ 6,12,000

Hence Debt = Total assets - Stockholder's equity = $19,30,000 - $ 6,12,000 = $ 13,18,000

Debt to Total asset ratio = Debt / Total assets = $13,18,000/ $ 19,30,000 *100 = 68.29% = 68% (approx.)

Hence the third option is the correct answer.

2. The liquidity ratios are known as current ratio and quick ratio of the company. It predicts the tenacity of the company to generate cash in order to meet the short-term financial commitments.

We know, Current ratio = Current assets / Current liabilities

Also, Current assets = Firm’s total asset – Firm’s long term asset

In the problem, Total assets = $ 2,10,000; long term assets = $ 60,000; inventory = $ 25,000;

Current Liabilities = $ 40,000

Hence, current assets = Total assets - long term assets = $210,000 - $60,000 = $1,50,000

Therefore, Current ratio = $1,50,000/$40,000 = 3.75 or 3.80

Quick ratio (acid-test ratio) = (Current assets – Inventory)/Current liabilities

= ($150,000 - $25,000)/$40,000

= $125,000/$40,000 = 3.12 or 3.1

Current ratio is 3.8 and quick ratio is 3.1

Therefore the fourth option is the correct answer

3. In the problem, Debt = $ 2,19,000 ; Debt/Total asset ratio = 75%; Net income = $ 48,180

Hence Asset = $ 2,19,000 / 0.75 = $ 2,92,000

Also, Shareholders equity = Asset - Debt = $ 2,92,000 - $2,19,000 = $ 73,000

We know, Return on equity = Net income/ Shareholder's equity = $ 48,180 / $ 73,000 x 100 = 66%

Hence the third option is the correct answer.