Answer an exercise question

Comparing Operating Characteristics Across Industries
Name
Institutional Affiliation
Question P2-50
Response
Firms have two primary sources to finance operations: equity and debt financing (Dyckman et al., 2018). Although the two facilities extend the same facilities to a from, they are different in treatment. For instance, equity financing requires issuing stocks which dilute the ownership while debt financing increases liabilities and additional costs in interests to be paid over the principal. The composition of debt in the two firms, Apple Inc. and HP., the analysis utilized the debt to equity metric.
The debt-equity ratio is a relative ratio between the total liabilities or debts that the entity has and shareholders’ equity. It is calculated using the following formula as outlined by Dyckman et al., (2018):
Debt-equity ratio=Total LiabilitiesShareholders’Equity
For the entities under consideration, the debt-equity ratio is computed as follows:
Firm Debt Equity Formula Debt-Equity ratio
Apple Inc. 120,292 111547 120292/111547 1.08
H.P. Inc. 76,475 26,731 76475/26731 2.86
Based on the above computations, both firms have more liabilities than the shareholder’s equity in the entities as both ratios are more than 1 in the ratios, e.g., Apple Inc. has 1.08 while H.P. has 2.86. However, comparing the two, H.P Inc. has a heavier debt than Apple Inc. relative to the shareholder’s equity. It is vital no note that in case of bankruptcy, the creditors ha…