Writing Assignment Unit 1

University of the People

BUS 3301 - Financial Accounting

Instructor Robert Nubukey

November 22, 2023

Question:

Mr. Joseph has identified five different companies in which he is interested in investing,

however, he has concerns over the economy and wants to invest in companies with the lowest

debt exposure. (These are the same companies analyzed in the discussion forum.) Mr. Joseph

would like you to do additional analysis. The following is a list of data for the investments.

Based on this data:

Calculate the debt-to-equity ratio and rank the investments based on least risky to most risky.

Explain the logic of your analysis.

Company Total Assets Total Liabilities Net Income

A $9,000,000 $2,000,000 $200,000

B 15,000,000 4,000,000 1,000,000

C 8,000,000 4,000,000 250,000

 D 18,000,000 6,000,000 1,600,000

E 28,000,000 22,000,000 4,000,000

Answer:
In order to find the least riskiest to the most risky, we must first calculate for equity. The

formulas we will be using are: total assets - total liabilities = total equity and

total debt/total equity = Debt - to - equity ratio

● Company A = 9,000,000 - 2,000,000 = 7,000,000

D/E = 2,000,000/7,000,00 = 0.29

● Company B = 15,000,000 - 4,000,000 = 11,000,000

D/E = 4,000,000/11,000,000 = 0.36

● Company C = 8,000,000 - 4,000,000 = 4,000,000

D/E = 4,000,000/4,000,000 = 1.0

● Company D = 18,000,000 - 6,000,000 = 12,000,000

D/E = 6,000,000/12,000,000 = 0.5

● Company E = 28,000,000 - 22,000,000 = 6,000,000

D/E = 22,000,000/6,000,000 = 3.67

Rank the investment base on least risky to most risky:

● According to our calculations above, company A is the least risky, followed by company

B, company D, and then company C and the most risky is the last which is company E.

Explain the logic of your analysis:

● Debt-to-Equity (D/E) ratio is a formula that compares a company’s total liabilities with

its shareholder equity. D/E ratios are beneficial to many industries as it provides direct

comparison in finances especially with other competitors, this will allow for any

alterations needed. (Fernando, 2023)

Calculation of debts and assets are very important as it can influence the amount

you may lose or gain in the future. If Mr. Joseph is keen on investing in companies with

lower ratios that means there’s a lower risk of loan default, which may seem safer

however there is still a risk in the future for future opportunities. He can choose between

the three companies with the lowest ratio,but there will still be risks for financial strain

and opportunities for the companies. Company E is the one he should avoid for now as it

is high ratio and risky.

In conclusion, it is very important to consider analyzing and collecting any significant

financial data before investing, because oftentimes it's a hit or a miss. Additionally, when

choosing a company to invest in, it is also wise to study its organizational skills as well as

its strengths and weaknesses as they all play a part in the financial decisions.

Reference
Fernando, J. (2023). Debt-to-Equity (D/E) Ratio formula and how to interpret

it.https://www.investopedia.com/terms/d/debtequityratio.asp