At the end of the current year, the following information is available for both pulaski company...
At the end of the current year, the following information is available for both pulaski company and scott company.
| Pulaski company | scott company | ||
| Total assets | 860,000 | 440,000 | |
| total liabilities | 360,000 | 240,000 | |
| total equity | 500,000 | 200,000 |
1.comupte the deb to equity ratios for both companies
2.comment on your results and discuss the riskiness of each company's financing structure
Homework Answers
1.. Calculation of debt-equity ratio :
Debt-equity ratio = Debt / equity
Pulaski company = total liabilities / equity
= 360000 / 500000
= 0.72 : 1
Scott Company = total liabilities / equity
=240000 / 200000
= 1.2 : 1
2.. Debt – equity ratio represents asset financing structure of company. Higher the ratio more risky the company as company may need to pay fixed interest rate on its debt irrespective of whether there are profit or not. Hence in the above case scott company has higher debt-equity ratio compare to Pulaski company stating that it has more risky financing structure
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