Question

Compute the debt-to-equity ratio for each of the following companies. Which company appears to have a riskier financing structure? Explain

	Atlanta Company	Spokane Company
Total liabilities	\( 429,000	\) 549,000
Total equity	\( 572,000	\) 1,830,000

Short answer

The debt-to-equity ratio for the Atlanta Company is0.75, and for the Spokane, company is 0.30

TheAtlanta Company has ariskierfinancing structure.

Step-by-step solution

Meaning of Debt-to-Equity Ratio

The debt-to-equity ratio shows the proportion of debt and the equity the business entity uses to finance its assets.

Calculation of debt-to-equity ratio

$\begin{array}{rcl}\text{Debt - to - equity} \text{ratio}\left(\text{Atlanta}\right)& =& \frac{\text{Total} \text{liabilities}}{\text{Total} \text{assets}}\\ & =& \frac{\$429,000}{\$572,000}\\ & =& 0.75\\ & & \end{array}$

$\begin{array}{rcl}\text{Debt - to - equity} \text{ratio}\left(\text{Spokane}\right)& =& \frac{\text{Total} \text{liabilities}}{\text{Total} \text{assets}}\\ & =& \frac{\$549,000}{\$1,830,000}\\ & =& 0.30\\ & & \end{array}$

Atlanta Company appears to have a riskier financing structure due to having a high debt-to-equity ratio.