You Are Considering a Stock Investment in One of Two

question 121

Multiple Choice

You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.) , both of which operate in the same industry. LotsofDebt, Inc. finances its $100 million in assets with $90 million in debt and $10 million in equity. LotsofEquity, Inc. finances its $100 million in assets with $10 million in debt and $90 million in equity. What are the debt ratio, equity multiplier, and debt-to-equity ratio for the two firms?

• A) LotsofDebt: 90 percent, 10 times, 9 times, respectively; and LotsofEquity: 10 percent, 1.11 times, 0.1111 times, respectively
• B) LotsofDebt: 10 percent, 1.11 times, 0.1111 times, respectively; and LotsofEquity: 90 percent, 10 times, 9 times, respectively
• C) LotsofDebt: 90 percent, 1.11 times, 0.1111 times, respectively; and LotsofEquity: 10 percent, 10 times, 9 times, respectively
• D) LotsofDebt: 10 percent, 10 times, 9 times, respectively; and LotsofEquity: 90 percent, 1.11 times, 0.1111 times, respectively

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Definitions:

Effectiveness Measure

An evaluation metric to assess the degree to which objectives or goals are achieved, often used in performance management.

Equivalent Units

A concept used in process costing that converts partially completed units into a number of fully equivalent completed units.

Physical Units

A measure used in manufacturing and production to count the actual units produced, irrespective of the production stage.

Units Started

The number of units of product that have begun the production process but are not yet completed.