Q1

Question 1

A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The debt-to-equity ratio is:
21%
26%
74%
79%

Answer 1

The debt-to-equity is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The debt-to-equity ratio is 26% ($225 million / [the par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million]). The debt-to-equity ratio is used to analyze the capital structure of a company.