The following data is from Delta’s common size financial statement: Earnings after taxes = 18% Equity = 40% Current assets = 60% Current liabilities = 30% Sales = $300 Total assets = $1,400 What is Delta’s total-debt-to-equity ratio? A) 1.5. B) 1.0. C) 2.0. D) 2.5. Schweser answer is A, w/ explanation - If equity = 40%, debt must = 60%, thus 60 / 40 = 1.5. I feel it should be current liabilities/equity = 40%/30% = 1.33 am grossly missing something bcz don’t get - how can debt = 60%, if eq = 40%?
D+E=Assets If equity is 40%, then debt has to be the other 60%
Gotch you. Knew it something real basic. Thank you.
they gave you Current Liabilities…and you needed to know that there are also LONG TERM liabilities on the BS, hence 60% debt, 40% equity, or 1.5x D/E ratio.
Where in J city are you? I’m like 30 mins south of you if you ever wanted to do a study session or share notes etc
Sure. Around grove street. Can you can email me at firstname.lastname@example.org. Will take it from der.
May be i am complicating it but : Assets = Liabilities + Equity Assets = 1400 Equity = 40% of total = 40% of 1400 = 560 Liabilities = 1400 - 560 = 840 Therefore, Total Liabilities / Total Equity = Debt to equity ratio = 840 / 560 = 1.5 Yeah now I am sure I have complicated it…but then this confirms !!!
yeah gotch you Bee. Guess I missed the basic equation n got lost while looking for non-current liabilities. Thanks guys.