The following information was drawn from the balance sheets of two companies:
| Company | Assets | = | Liabilities | + | Equity | ||||||
| Ever-Well | 200,000 | 86,000 | 114,000 | ||||||||
| Eat-Right | 602,000 | 172,000 | 430,000 | ||||||||
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| Required | |||||||||||||||||||||||||||||||||||||||||||||||||
| a. |
Compute the debt to assets ratio to measure the level of financial risk of both companies.
b. Compare the two ratios computed in Requirement a to identify which company has the higher level of financial risk.
Answer
Ever-Well
b.
Based
only on the debt to assets ratio, Ever-Well Company has more financial
risk than Eat-Right Company because it is financing more of its assets
with borrowed money.
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