You Are Considering a Stock Investment in One of Two

question 123

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:

Prepaid Expenses

Expenses paid for in advance and recorded as assets until they are actually used or consumed.