You Are Considering a Stock Investment in One of Two

question 87

Multiple Choice

You are considering a stock investment in one of two firms (A and B) , both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the debt-to-equity ratio for the two firms.

• A) Firm A: 9 times; Firm B: 1.11 times
• B) Firm A: 19 times; Firm B: 0.11 times
• C) Firm A: 9 times; Firm B: 0.11 times
• D) Firm A: 19 times; Firm B: 1.11 times

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Definitions:

Earnings Retention Ratio

The proportion of a company's earnings not distributed as dividends but reinvested back into the company.

Market Capitalization Rate

The expected return on a security or a portfolio, equivalent to the expected growth rate of its dividends or earnings.

Present Value of Growth Opportunities

The value today of an investment's expected growth opportunities, used to analyze potential future value creation.

ROE

Return on Equity is an indicator of a company's financial performance, illustrating the amount of profit generated per dollar of shareholders' investment.