If you’re in a business strategy class, you may be taking the Global Business Simulation Strategy Game, or for short, “Glo-Bus”. You will most likely be taking two quizzes in this course, Glo-Bus Quiz 1, and Glo-Bus Quiz 2. Both quizzes will go over concept basics of the game, and especially Quiz 2 can have very difficult questions. Many of the questions are financial based. Here’s one example question that you will most likely get.
Given the following Financial Statement data:
Income Statement Data Quarter 1
Sales Revenues $50,000
Operating Profit $14,400
Net Income $9,555
Balance Sheet Data
Total Current Assets $70,000
Total Assets $149,000
Total Current Liabilities $26,000
L-T Debt (draw against credit line) $33,000
Total Equity $90,000
Other Financial Data
Dividend payments $2,250
Based on the above figures, the company’s capital structure consists of what debt and equity percentages? (These percentages are one of the components used in determining the company’s credit rating, as explained on the Help screen for the Comparative Financial Performance page of the GSR.)
Here are the 5 answers.
20% debt and 80% equity or 20:80.
27% debt and 73% equity or 27:73.
35% debt and 65% equity or 35:65.
37% debt and 63% equity or 37:63.
None of these.
So to answer this question, we must look at this income statement and conclude what debt and equity is.
Total Equity shows itself at $90,000, so that’s easy.
But the real hard part is deciphering what debt is. Believe it or not, but current liabilities isn’t part of “debt”. And that’s a mistake that people make.
So debt is simply Long term debt at $33,000 But then what?
To figure out the correct ratio, the formula for debt ratio= debt/(debt+equity)
[And for note the equity ratio=equity/(debt+equity)]
Or therefore 33,000/(33,000+90,000)=.268 or what equals 27%. Therefore the debt ratio is 27%, and the balance being 73% is equity.
The correct answer is the second one!