Question

At the end of Year 1, the following information is available for Grumpy, Happy, and Doc Companies.

 Grumpy Happy Doc Total Assets \$ 2,000,000 \$ 2,000,000 \$ 3,000,000 Total Liabilities 1,400,000 800,000 1,800,000 Stockholders' Equity 600,000 1,200,000 1,200,000 Net Income 118,000 190,000 150,000

8.1)       Which company has the highest level of debt risk?

A)    Grumpy
B)    They all have equal debt risk
C)    Happy
D)    Doc

8.2)       Which company is the most profitable from the stockholders' perspective?

A)    Grumpy
B)    Doc
C)    Cannot be determined
D)    Happy

8.3)       Which company has the highest return-on-assets ratio?

A)    They all have equal return-on-assets ratios.
B)    Grumpy.
C)    Doc.
D)    Happy.

1.

The debt-to-assets ratio measures the level of debt risk.

Debt-to-assets ratio = Total debt ÷ Total assets

Grumpy= \$1,400,000 ÷ \$2,000,000 = 70%

Happy= \$800,000 ÷ \$2,000,000 = 40%

Doc= \$1,800,000 ÷ \$3,000,000 = 60%

Grumpy has the highest debt-to-assets ratio.

Hence, correct option is A. Grumpy

2.

The return-on-equity ratio measures profitability from the owners’ perspective.

Return-on-equity ratio = Net income ÷ Stockholders’ equity

Grumpy= \$118,000 ÷ \$600,000 = 19.67%

Happy= \$190,000 ÷ \$1,200,000 = 15.83%

Doc= \$150,000 ÷ \$1,200,000 = 12.5%

Grumpy has the highest return-on-equity ratio.

Hence, correct option is A.Grumpy

3.

Return-on-assets ratio = Net income ÷ Total assets

Grumpy= \$118,000 ÷ \$2,000,000 = 5.9%

Happy= \$190,000 ÷ \$2,000,000 = 9.5%

Doc= \$150,000 ÷ \$3,000,000 = 5%

Happy has the highest return-on-assets ratio.

Hence, correct option is D. Happy