Question

the following information is available for both pulaski company and scott company at the current year - end.

	pulaski company	scott company
total liabilities	871,500	565,500
total equity	1,416,000	591,000

complete this question by entering your answers in the tabs below.
required 1 required 2
which company has the riskier financing structure?
< previous required 2 >

Explanation:

Step1: Calculate debt ratio for Pulaski

Debt ratio = $\frac{\text{Total Liabilities}}{\text{Total Assets}}$
$\frac{871,500}{2,287,500} = 0.381$

Step2: Calculate debt ratio for Scott

Debt ratio = $\frac{\text{Total Liabilities}}{\text{Total Assets}}$
$\frac{565,500}{1,156,500} = 0.489$

Step3: Compare the two ratios

A higher debt ratio means riskier financing, as it indicates more reliance on borrowed funds. 0.489 > 0.381.

Answer:

Scott Company has the riskier financing structure.