Question

Mr. Joseph has identified five different companies in which he is interested in investing, however, he has concerns over the economy and wants to invest in companies with the lowest debt exposure. The following is a list of data for the investments:

Company Total Assets Total Liabilities Net Income
A $10,000,000 $1,000,000 $200,000
B 20,000,000 3,000,000 1,000,000
C 6,000,000 4,000,000 250,000
D 15,000,000 6,000,000 1,600,000
E 30,000,000 22,000,000 4,000,000

Required:
Calculate the debt-to-equity ratio and rank the investments base on least risky to most risky.

Answer 1

Answer and Explanation:

The computation is shown below:

Company Total Assets (a) Total Liabilities (b) Net Income Debt to assets ratio (a÷b) Rank

A $10,000,000 $1,000,000 $200,000 0.1 1

B $20,000,000 $3,000,000 $1,000,000 0.15 2

C $6,000,000 $4,000,000 $250,000 0.666667 4

D $15,000,000 $6,000,000 $1,600,000 0.4 3

E $30,000,000 $22,000,000 $4,000,000 0.733 5