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

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Mike & Kat Racing Company Balance Sheets December 31, 2010o December 31, 2009 Current assets: Cash .. Accounts receivable, net Inventory ... Prepaid expenses Total current assets $186,000 94,000 185,000 17.000 482,000 215,000 $697.000 $192,000 85,000 170,500 14.000 461,500 195,000 $656,500 Equipment, net .... Total assets $267,000 185,000 452,000 163,750 81.250 $697.000 $269,000 190,000 459,000 148,250 49,250 $656,500 Total current liabilities Long-term liabilities. Total liabilities .... Shareholders' equity Retained earnings.. Total liabilities and shareholders' equity