By NEAS - 7/7/2024 10:04:47 PM
FA Module 11 Solvency ratios practice exam questions
covering non-debt liabilities, debt-to-equity ratio, debt to assets ratio, debt to (total) capital ratio
(The attached PDF file has better formatting.)
On December 30, 20XX, a firm has non-debt liabilities of 188, a debt-to-equity ratio of 42%, and a debt to assets ratio of 18%. On December 31, 20XX, the firm issues additional debt of 79 and uses the proceeds to repurchase outstanding shares.
Question 11.1: Debt
What is the firm’s debt on December 30, 20XX?
Answer 11.1: (188 × 0.18) / (1 – 0.18 – (0.18 / 0.42) ) = 86.45
Let dter = debt-to-equity ratio and dtar = debt to assets ratio
debt / (non-debt liabilities + debt + debt / dter) = dtar ➾
debt = (non-debt liabilities + debt + debt / dter) × dtar ➾
debt × (1 – dtar – dtar / dter) = non-debt liabilities × dtar ➾
debt = non-debt liabilities × dtar / (1 – dtar – dtar / dter)
Question 11.2: Equity
What is the firm’s equity on December 30, 20XX?
Answer 11.2: 86.45 / 0.42 = 205.83
Question 11.3: Assets
What are the firm’s assets on December 30, 20XX?
Answer 11.3: 86.45 / 0.18 = 480.28
Question 11.4: Debt
What is the firm’s debt on December 31, 20XX?
Answer 11.4: 86.45 + 79 = 165.45
Question 11.5: Equity
What is the firm’s equity on December 31, 20XX?
Answer 11.5: 205.83 – 79 = 126.83
Question 11.6: Debt to (total) capital ratio
What is the firm’s debt to (total) capital ratio on December 31, 20XX?
Answer 11.6: 165.45 / (165.45 + 126.83) = 0.566
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