Dave’s Guitar Shop is considering building an additional property onto the back of its existing building for more storage. Dave consults with his banker about applying for a new loan. The bank asks for Dave’s balance to examine his overall debt levels. Dave’s total assets are P5,000,000, while his total liabilities are P25,000. Compute Dave’s debt ratio.
Answer (1)
Answer:Here's how to calculate Dave's debt ratio: Debt Ratio Formula: Debt Ratio = Total Liabilities / Total Assets Calculation: - Total Liabilities = P25,000- Total Assets = P5,000,000 Debt Ratio = P25,000 / P5,000,000 = 0.005 Result: Dave's debt ratio is 0.005 or 0.5%. Interpretation: A debt ratio of 0.5% indicates that Dave has a very low level of debt compared to his assets. This is a very favorable position for securing a loan. Banks typically prefer borrowers with low debt ratios as it suggests a lower risk of default.
