Question

At the end of the current year, the following information is available for both Pulaski Company and Scott Company.

	Pulaski company	Scott company
Total asset	\(860,000	\)440,000
Total liability	360,000	240,000
Total equity	500,000	200,000

Required

1. Compute the debt-to-equity ratios for both companies.
2. Comment on your results and discuss the riskiness of each company’s financing structure

Short answer

1. The debt-to-equity ratio of Pulaski and Scott Company is 0.72and 1.83, respectively.

2. The financial structure of Scott's company is riskier.

Step-by-step solution

Meaning of Debt-to-Equity ratio

The debt-to-equity ratio is the proportional relationship of total liabilities to total equity.

Computing the debt-to-equity ratios of both companies

Calculation of debt-to-equity ratio of Pulaski Company

$debttoequityratio=\frac{\$360,000}{500,000}$

The debt-to-equity ratio of Pulaski Company is 0.72

Calculation of debt to equity ratio of Scott Company

$debttoequityratio=\frac{\$440,000}{\$240,000}$

The debt-to-equity ratio of Scott Company is 1.83

Explanation regarding the riskiness of both companies

The debt-to-equity ratio for the Pulaski Company is 0.72, and for the Scott company is 1.83, suggesting that financing for the second company is riskier than that for the first.