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If you’re in a business strategy class, you may be taking the Global Business Simulation Strategy Game, or “Glo-Bus” for short. You will most likely take two tests in this course, the Glo-Bus Test 1 and the Glo-Bus Test 2. Both tests will go over the basics of the game and especially Test 2 can have very difficult questions. Many of the questions are financially based. Here is an example question that you will probably get.
Given the following data from the financial statements:
First quarter income statement data
(in thousands)
Sales revenue $ 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
Long-term debt (line of credit withdrawal) $ 33,000
Total capital $ 90,000
Other financial data
Depreciation $ 4,000
Dividend payments $ 2,250
Based on the above figures, the capital structure of the company consists of what percentages of debt and equity capital? (These percentages are one of the components used to determine the company’s credit rating, as explained in the Help screen on the GSR Comparative Financial Performance page.)
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 those.
So, to answer this question, we must look at this income statement and conclude what is debt and equity.
Total Equity is shown at $ 90,000, so that’s easy.
But what is really difficult is figuring out what debt is. Believe it or not, but current liabilities are not part of “debt.” And that’s a mistake people make.
So the debt is simply long-term debt at $ 33,000. But then what?
To calculate the correct ratio, the formula for the ratio of debt = debt / (debt + equity)
[And for note the equity ratio=equity/(debt+equity)]
Or therefore 33,000 / (33,000 + 90,000) =. 268 or what equates to 27%. Therefore, the debt ratio is 27% and the balance of 73% corresponds to equity.
The correct answer is the second!
