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Exercise

Leverage ratios

Leverage ratios are a measure of how much equity and debt is used by the company in running its operations. Running a company with too much debt might sound bad initially, but if it makes enough cash inflows (more on this in the third chapter) to pay off its debts, having a lot of debt is not necessarily bad. Similarly, having too much equity is not necessarily as beneficial as one might think. It might be inefficient because a company could be borrowing more money to grow its operations.

In this exercise, you'll compute the debt-to-equity and equity multiplier ratios. Relevant items from the balance sheet have already been defined for you as variables.

You will first use these to compute total assets, liabilities, and shareholders' equity. You'll then use these values to compute the debt-to-equity and equity multiplier ratios.

Instructions 1/2

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  • Compute total assets.
  • Compute total liabilities.
  • Compute total shareholders' equity.