Using the year-end information for each of the following six separate companies ($ thousands): AssetsNet Income
Company 1$ 90,500$ 11,765 $ 100,000 $ 20,000
Company 264,00046,720 40,000 3,800
Company 332,50026,650 50,000 650
Company 4147,00055,860 200,000 21,000
Company 592,00031,280 40,000 7,520
Company 6104,50052,250 80,000 12,000

a.
Calculate the debt ratio and the return on assets. (Round your debt ratios to 2 decimal places and return on assets to 3 decimal places.)

Case Debt Ratio ROA

Company 1

Company 2

Company 3

Company 4

Company 5

Company 6

b.

.Of the six companies, which business relies most heavily on creditor financing?

c.

Of the six companies, which business relies most heavily on equity financing?

d.

Which two companies indicate the greatest risk?

e.

Which two companies indicate the greatest risk?

f.

Which one company would investors likely prefer based on the risk

Year-end Information

a.  Calculation of the debt ratio and the return on assets. (Round your debt ratios to 2 decimal places and return on assets to 3 decimal places.)

Case                      Debt Ratio                           ROA

Company 1   =  13.00% ($11,765/$90,500)       22.099% ($20,000/$90,500)

Company 2  =  73.00% ($46,720/$64,000)      5.938% ($3,800/$64,000)

Company 3  =  82.00% ($26,650/$32,500)    2.000% ($650/$32,500)

Company 4  = 38.00% ($55,860/$147,000)     14.286%($21,000/$147,000)

Company 5  = 34,00% ($31,280/$92,000)       8.174% ($7,520/$92,000)

Company 6  = 50.00% ($52,250/$104,500)    11.483%($12,000/$104,500)

b. Of the six companies, which business relies most heavily on creditor financing?

Company 3 relies most heavily on creditor financing, with a ratio of 82%.

c.  Of the six companies, which business relies most heavily on equity financing?

Company 1 relies most heavily on equity financing, of about  87%.

d.  Which two companies indicate the greatest risk?

Companies 2 and 3 indicate the greatest risk, with heavy reliance on debt financing and less than optimal performance.

e.  Which two companies indicate the lowest risk?

Companies 1 and 4 indicate the lowest risk.

f. Which one company would investors likely prefer based on the risk

Company 1 has the lowest risk profile.

Explanation:

a) Schedule of Companies' Assets, Liabilities, Average Assets, & Net Income:

Case                Assets        Liabilities       Average Assets      Net Income

Company 1   $ 90,500        $ 11,765           $ 100,000             $ 20,000

Company 2     64,000          46,720                40,000                   3,800

Company 3     32,500         26,650                50,000                      650

Company 4    147,000         55,860              200,000                 21,000

Company 5    92,000           31,280                40,000                   7,520

Company 6   104,500         52,250                80,000                  12,000

b) The debt ratio or the debt to asset ratio or the total debt to total assets ratio indicates the percentage of the total asset amounts (as reported on the balance sheet) that is owed to creditors and has the formula as total liabilities divided by total assets.

c) Total assets are liabilities plus equity on the balance sheet. To calculate ROA, use the following return on assets formula: ROA = Net Income / Total Assets.  Return on assets (ROA) helps investors measure how management is using its assets or resources to generate more income.

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