Question

Omni Technology Holding Company has the following three affiliates:

	Software	Personal Computers	Foreign Operations
Sales	\(40,200,000	\)60,080,000	$100,680,000
Net Income (after tax)	2,086,000	2,880,000	8,510,000
Assets	5,820,000	25,790,000	60,630,000
Stockholder’s equity	4,090,000	10,170,000	50,950,000

e. Which affiliate has the highest debt ratio? (Assets minus stockholders’ equity equals debt.)

Short answer

The debt ratio of personal computers (i.e. 60.57%) is the highest.

Step-by-step solution

Debt ratio of Software

$\begin{array}{rcl}\mathrm{Debt}\mathrm{ratio}& =& \frac{\left(\mathrm{Assets}-\mathrm{Stockholder}\text{'}\mathrm{s}\mathrm{equity}\right)}{\mathrm{Total}\mathrm{assets}}\\ & =& \frac{\left(\$5,820,000-\$4,090,000\right)}{\$5,820,000}\\ & =& 29.73\%\end{array}$

Debt ratio of Personal computers

$\begin{array}{rcl}\mathrm{Debt}\mathrm{ratio}& =& \frac{\left(\mathrm{Assets}-\mathrm{Stockholder}\text{'}\mathrm{s}\mathrm{equity}\right)}{\mathrm{Total}\mathrm{assets}}\\ & =& \frac{\left(\$25,790,000-\$10,170,000\right)}{\$25,790,000}\\ & =& 60.57\%\end{array}$

Debt ratio of Foreign operations

$\begin{array}{rcl}\mathrm{Debt}\mathrm{ratio}& =& \frac{\left(\mathrm{Assets}-\mathrm{Stockholder}\text{'}\mathrm{s}\mathrm{equity}\right)}{\mathrm{Total}\mathrm{assets}}\\ & =& \frac{\left(\$60,630,000-\$50,950,000\right)}{\$60,630,000}\\ & =& 15.97\%\end{array}$