You are considering a stock investment in one of two firms (A and B), both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the debt-to-equity ratio for the two firms.
A) Firm A: 9 times; Firm B: 1.11 times
B) Firm A: 19 times; Firm B: 0.11 times
C) Firm A: 9 times; Firm B: 0.11 times
D) Firm A: 19 times; Firm B: 1.11 times

Question

Quizplus · Accepted Answer

Firm A's debt-to-equity ratio is $18 million / $2 million = 9 times. Firm B's debt-to-equity ratio is $2 million / $18 million = 0.11 times.

You Are Considering a Stock Investment in One of Two