Question

QuestionKey figures forAppleandGooglefollow.

Total assets . \(290,479 \)231,839 \(147,461 \)129,187

Total liabilities . 171,124 120,292 27,130 25,327

Total equity . 119,355 111,547 120,331 103,860

Required

1.Compute the debt-to-equity ratios for Apple and Google for both the current year and the prior year.

2.Use the ratios you computed in part 1 to determine which company’s financing structure is least risky.Assume an industry average of 0.44 for debt-to-equity.

Short answer

(1) Debt-to-equity ratio

Apple		Google
Current year	Prior year	Current year	Prior year
1.43	1.08	0.23	0.24

(2) Google is less risky.

Step-by-step solution

Definition of debt-to-equity ratio

The debt-to-equity ratio expresses the relationship between total debt and the company's equity.

Calculation of the debt-to-equity ratio

The debt-to-equity ratio of Apple inthe current year:

$\begin{array}{c}\mathbf{Debt}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{Equity}\mathbf{Ratio}\mathbf{=}\frac{\mathbf{Total}\mathbf{Debt}}{\mathrm{Equity}}\\ \mathbf{=}\frac{\$171,124}{\$119,355}\\ \mathbf{=}\mathbf{1}\mathbf{.}\mathbf{43}\end{array}$

The debt-to-equity ratio of Apple in the prior year:

$\begin{array}{c}\mathbf{Debt}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{Equity}\mathbf{Ratio}\mathbf{=}\frac{\mathbf{Total}\mathbf{Debt}}{\mathrm{Equity}}\\ \mathbf{=}\frac{\$120,292}{\$111,547}\\ \mathbf{=}\mathbf{1}\mathbf{.}\mathbf{0}8\end{array}$

The debt-to-equity ratio of Google in the current year:

$\begin{array}{c}\mathbf{Debt}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{Equity}\mathbf{Ratio}\mathbf{=}\frac{\mathbf{Total}\mathbf{Debt}}{\mathrm{Equity}}\\ \mathbf{=}\frac{\$27,130}{\$120,331}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{2}3\end{array}$

The debt-to-equity ratio of Google in the prior year:

$\begin{array}{c}\mathbf{Debt}\mathbf{-}\mathbf{to}\mathbf{-}\mathbf{Equity}\mathbf{Ratio}\mathbf{=}\frac{\mathbf{Total}\mathbf{Debt}}{\mathrm{Equity}}\\ \mathbf{=}\frac{\$25,327}{\$103,860}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{24}\end{array}$

Step 3:Less risky ratio

The debt-to-equity ratio of Google Company is less risky than that of Apple Company because debts used by the Apple company is high, which increases the overall risks of the shareholders.