At the end of the current year, the following information is available for both the Pulaski...
At the end of the current year, the following information is available for both the Pulaski Company and the Scott Company.
| Pulaski Company | Scott Company |
Total assets | $1,800,000 | $900,000 |
Total liabilities | 720,000 | 480,000 |
Total equity | 1,080,000 | 420,000 |
Required
1. Compute the debt-to-equity ratio for both companies.
2. Comment on your results and discuss the riskiness of each company’s financing structure.
Homework Answers
Part 1
Pulaski Company debt-to-equity = $720,000 / $1,080,000 =0.67
Scott Company debt-to-equity = $480,000 / $420,000 = 1.14
Part 2
Scott’s debt-to-equity ratio is higher than Pulaski's. This implies that Scott is more risky. However, before deciding if either company’s debt-to-equity ratio is too high (or too low), it is important to evaluate the ability of each company to meet its obligations from operating cash flows.
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