Use the balance sheets from Mike & Kat Racing Company in E10- 32B to compute a debt- to- equity ratio for 2010 and 2009. Suppose you calculated a debt ratio using debt plus equity as the denominator. Which ratio— debt- to- equity or debt-to- debt plus equity— seems easiest to interpret? As an investor, do you view the “trend” in the debt- to- equity ratio as favorable or unfavorable? Why? In E10- 32B  .:. SOLUTIO:  The debt to debt plus equity ratio is easier to interpret because it simply gives debt as a percentage of the firm’s total financing. The trend here suggests that the company is in a better position in 2010 than In 2009 so the trend Is favorable. The company has less debt relative to equity (because of a large increase in equity) and is therefore a less risky investment.

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