Below are two separate questions from the Fixed Income section. Both involve some form of the Debt/Capial Ratio Ratio. The treatment of this ratio seems inconsistent, in the first question “capitalization” takes into account all assets, in the second question it does not. Also in regards to the first question, I am never sure of when “liabilities” are considered debt. If there is an accounts payable amount, is this debt? How do we know whether current liabilities in the first part considers A/P and does this matter.
Total Assets = 1,269
Current Liabilities 120
Long Term Debt 850
Shareholders Equity 299
Question: What is the total debt to capitalization ratio?
Answer: (850 +120)/1269 = 76.4%
Total Assets 10,618
Total Debt 1,613
Shareholders equity 4,616
Question: What is the debt/capital ratio?
Answer: 1613/(1613+4616) = 25.9%