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9 September, 15:06

ou 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.

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  1. 9 September, 15:30
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    Answer: A = 9 and firm B = 0.11

    Explanation:

    Debt to equity ratio = Total Liability / total equity

    Firm A = 18000000 / 2000000

    Debt to equity ratio of firm A = 9

    Firm B = 2000000 / 18000000

    Debt to equity ratio of firm B = 0.11
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