| 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.
| Company | Total Debt | ÷ | Total Assets | = |
Debt to Assets Ratio
| ||||||
| Ever-Well | $ | 86,000 | ÷ | $ | 200,000 | = | 43.0 | % | |||
| Eat-Right | $ | 172,000 | ÷ | $ | 602,000 | = | 28.6 | % | |||
| | |||||||||||
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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