A firm has a long-term debt-equity ratio of 0.5. Shareholders’ equity is $1.07 million. Current assets are $256,500, and the current ratio is 1.9. The only current liabilities are notes payable. What is the total debt ratio? (Round your answer to 2 decimal places.)
Well, well, well, looks like we've got ourselves a financial detective here! Let's crunch some numbers and solve this mystery.
To find the total debt ratio, we need to calculate the total debt first. We know that the long-term debt-equity ratio is 0.5, which means for every dollar of shareholders' equity, there's 50 cents of long-term debt.
So, the total debt would be 0.5 times the shareholders' equity: 0.5 * $1.07 million = $0.535 million.
Now, we also know that the current assets are $256,500 and the current ratio is 1.9. The current ratio is calculated by dividing current assets by current liabilities.
Since the only current liabilities are notes payable, we can assume that the current liabilities equal the notes payable. So, we can rewrite the current ratio equation as:
1.9 = $256,500 / notes payable
Now, let's solve for notes payable:
notes payable = $256,500 / 1.9
notes payable ≈ $135,000.
Alright, now we have all the pieces of the puzzle. To find the total debt ratio, we need to add the total debt (long-term debt) to the current liabilities (notes payable) and divide it by the total assets.
Total debt ratio = (Total debt + Current liabilities) / Total assets
Total debt ratio = ($0.535 million + $135,000) / ($1.07 million + $256,500)
Total debt ratio ≈ $670,000 / $1,326,500
Now, let's do the math:
Total debt ratio ≈ 0.505 (rounded to 2 decimal places)
So, the total debt ratio is approximately 0.51 or 51% (rounded to 2 decimal places). Ta-da! Case closed!
To find the total debt ratio, we need to calculate the total debt of the firm.
Given:
Long-term debt-equity ratio = 0.5
Shareholders' equity = $1.07 million
Current assets = $256,500
Current ratio = 1.9
The current ratio is the ratio of current assets to current liabilities. In this case, the only current liabilities are notes payable.
Let's calculate the current liabilities using the current ratio formula:
Current Ratio = Current Assets / Current Liabilities
1.9 = $256,500 / Current Liabilities
To find the current liabilities, we can rearrange the equation:
Current Liabilities = $256,500 / 1.9
Current Liabilities ≈ $135,000
Now, to find the total debt, we can use the long-term debt-equity ratio formula:
Long-term Debt-Equity Ratio = Total Debt / Shareholders' Equity
0.5 = Total Debt / $1.07 million
Rearranging the equation to find the total debt:
Total Debt = 0.5 * $1.07 million
Total Debt ≈ $535,000
Finally, to calculate the total debt ratio, we'll use the formula:
Total Debt Ratio = Total Debt / Total Assets
Since we don't have the total assets directly given, let's calculate it using the current assets and liabilities:
Total Assets = Current Assets + Total Debt
Total Assets = $256,500 + $535,000
Total Assets ≈ $791,500
Now, we can calculate the total debt ratio:
Total Debt Ratio = $535,000 / $791,500
Total Debt Ratio ≈ 0.6763 (rounded to 2 decimal places)
Therefore, the total debt ratio is approximately 0.68.