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Lowe’s: Ratio of liabilities to stockholders’ equity
Lowe’s Companies, Inc., a major competitor to The Home Depot in the home improvement retail business, operates over 1,800 stores. Lowe's recently reported the following end-of-year balance sheet data (in millions):
| Year 3 | Year 2 | Year 1 | |
| Total assets | $32,732 | $32,666 | $33,559 |
| Total liabilities | 20,879 | 18,809 | 17,026 |
- A. Determine the total stockholders’ equity at the end of Years 1, 2, and 3.
- B. Compute the ratio of liabilities to stockholders’ equity for all three years. (Round to two decimal places.)
- C. What conclusions regarding the margin of protection to creditors can you draw from the trend in this ratio for the three years?
- D. Using the balance sheet data for Home Depot in ADM-2, how does Lowe’s ratio of liabilities to stockholders’ equity compare to that of Home Depot?
a)
Ratio of liabilities to stockholders' equity: Ratio of liabilities to stockholders' equity shows the relationship between the liabilities and the owner's equity. This ratio measures the claims of creditors over the claims of owners in financing the assets. A lower ratio indicates that the company has good ability to pay off the creditors’ obligations.
Total liabilities at the end of the years 2 and 1 for Company LC.
Answer to Problem 1.3ADM
Total liabilities at the end of the years 2 and 1 for Company LC, is given below:
| Year 1 | Year 2 | Year 3 | |
| Total Assets | $33,559 | $32,666 | $32,732 |
| Total Liabilities | $17,026 | $18,809 | $20,879 |
| Total Stockholder's equity | (1) $16,533 | (2) $13,857 | (3) $11,853 |
Table (1)
Explanation of Solution
Working note:
Calculate the liabilities at the end of the years 2 and 1 for Company LC.
b)
The ratio of liabilities to stockholders' equity of Company LC.
Answer to Problem 1.3ADM
The ratio of liabilities to stockholders' equity of Company LC for:
Year 1 =
Year 2 =
Year 3 =
Explanation of Solution
Working note:
Determine ratio of liabilities to owners’ equity of Company LC for Year 1, if total liabilities is $17,026, and total owners’ equity is $16,533.
Determine ratio of liabilities to owners’ equity of Company LC for Year 2, if total liabilities is $18,809, and total owners’ equity is $13,857.
Determine ratio of liabilities to owners’ equity of Company LC for Year 3, if total liabilities is $20,879, and total owners’ equity is $11,853.
c)
To derive: A conclusion regarding the margin of protection to the creditors from the ratio of liabilities to stockholders' equity of Company LC.
Explanation of Solution
The creditor’s risk has increased from 1.03 in year 1 to 1.36 in year 2 and 1.76 in the year 3. A lower ratio indicates that the company has good ability to pay off the creditors’ obligations. But the Company LC is showing a greater value of ratio year after year; hence the risk of repayment has increased gradually every year.
d)
To Compare: The ratio of liabilities to stockholders' equity of Company LC and Company THD.
Answer to Problem 1.3ADM
The creditor’s risk has increased from 1.03 in year 1 to 1.36 in year 2 and 1.76 in the year 3 for Company LC and creditor’s risk has increased 1.26 in year 1 to 1.35 in year 2 and 2.24 in the year 3 for Company THD. This shows an increased risk at the end of both the companies; however the Company THD has a greater risk when compared with Company LC.
Explanation of Solution
Working note:
Total liabilities at the end of the years 2 and 1 for Company THD, is given below:
| Year 1 | Year 2 | Year 3 | |
| Total Assets | $40,518 | $41,804 | $40,518 |
| Total Owner's equity | $17,898 | $17,777 | $12,522 |
| Total Liabilities | (7) $22,620 | (8) $24,027 | (9) $27,996 |
Table (2)
Calculate the liabilities at the end of the years 2 and 1 for Company THD.
The ratio of liabilities to stockholders' equity of Company THD for:
Year 1 =
Year 2 =
Year 3 =
Determine ratio of liabilities to owners’ equity of Company THD for Year 1, if total liabilities is $22,620, and total owners’ equity is $17,898.
Determine ratio of liabilities to owners’ equity of Company THD for Year 2, if total liabilities is $24,027, and total owners’ equity is $17,777.
Determine ratio of liabilities to owners’ equity of Company THD for Year 3, if total liabilities is $27,996, and total owners’ equity is $12,522.
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Chapter 1 Solutions
Corporate Financial Accounting
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