Mars Limited has total debt of $120 million, total equity of $80 million, total assets of $200 million, EBIT of $50 million, interest expense of $8 million, depreciation of $10 million and principal of $12 million. Calculate equity to asset ratio.

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BlackTom AI · Accepted Answer

Question restatement:
Mars Limited has total debt of $120 million, total equity of $80 million, total assets of $200 million, EBIT of $50 million, interest expense of $8 million, depreciation of $10 million and principal of $12 million. Calculate equity to asset ratio.

Option analysis:
Option A: 60.00% - This would correspond to equity of $120 million relative to $200 million assets (120/200 = 0.60). However Mars’ equity is actually $80 million, not $120 million, so this overstates the ratio.

Option B: 25.00% - This would be equity of $50 million relative to $200 million assets (50/200 = 0.25). But Mars’ equity is $80 million, so this underestimates the true ratio.

Option C: 66.67% - This matches the ratio of equity to debt (80/120 ≈ 0.6667), i.e., equity relative to debt, not to total assets. While mathematically correct for that comparison, it uses the wrong denominator for the equity-to-asset ratio, so it’s not the requested measure.

Option D: 40.00% - This is equity divided by total assets (80/200 = 0.40), which is the standard equity-to-asset ratio. The correct computation uses the given asset base, not liabilities or income metrics.

Notes on the data:
- The calculation of equity to asset ratio uses only equity and total assets. The figures for EBIT, interest, depreciation, and principal do not affect this ratio directly.
- Assets include both liabilities and equity via the accounting equation (Assets = Liabilities + Equity). Here, 200 million in assets equals 120 million in debt plus 80 million in equity, confirming the base numbers for the ratio.

Summary:
- The correct approach computes 80 million in equity divided by 200 million in assets, yielding 0.40 or 40%. The other options misapply the denominator or mix up the ratio concept (equity-to-debt or mis-read percentages), leading to incorrect results.

BFIL001 Week 8 Practice Quiz

Mars Limited has total debt of $120 million, total equity of $80 million, total assets of $200 million, EBIT of $50 million, interest expense of $8 million, depreciation of $10 million and principal of $12 million. Calculate equity to asset ratio.

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