Question

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

	Atlas company	Bryan company
Total asset	\(180,000	\)750,000
Total liability	80,000	562,500
Total equity	100,000	187,500

Required

1. Compute the debt-to-equity ratios for both companies.
2. Comment on your results and discuss what they imply about the relative riskiness of these companies.

Short answer

(1) The debt-to-equity ratio of Atlas company is 0.8 and Bryan company is 3.

(2) Bryan company is highly risky company as it has more debts

Step-by-step solution

Debt-to-equity ratios

The debt-to-equity ratios is the solvency measuring tool. It is calculated by dividing total liabilities by total equity.

(1) Computing the debt-to-equity ratios of both companies

Debt-to-equity ratio of Atlascompany

$\begin{array}{c}Debttoequityratio=\frac{Totalliabilities}{Totalequity}\\ =\frac{\$80,000}{100,000}\\ =0.80\end{array}$

Debt to equity ratio of Bryancompany

$\begin{array}{c}Debttoequityratio=\frac{Totalliabilities}{Totalequity}\\ =\frac{\$562,500}{\$187,500}\\ =3\end{array}$

Comparison between companies

The debt-to-equity ratio for the Atlascompany is 0.80 and for the Bryan company is 3, suggesting that financing for the Bryan company is riskier than that for the Atlas company.