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The Global Business Simulation Strategy Game – Glo – Bus Quiz Answers
If you’re in a business strategy class, you can participate in a global business simulation strategy game, or “Glo-Bus” for short. You will probably complete two quizzes in this course, Glo-Bus Quiz 1 and Glo-Bus Quiz 2. Both quizzes cover the basics of the game and Quiz 2 in particular can have very difficult questions. Many questions are financial. Here is one example that you will most likely get.
Given the following financial statement data:
Income statement data, 1st quarter
(in thousands)
Sales revenue $50,000
Business profit $14,400
Net profit $9,555
Balance sheet data
Current assets total $70,000
Total assets $149,000
Current liabilities total $26,000
LT debt (accepting line of credit) $33,000
Total equity $90,000
Other financial data
Depreciation $4,000
Dividend payments $2,250
Based on the figures above, what percentages of debt and equity does the company’s capital structure consist of? (These percentages are one of the components used to determine a company’s credit rating, as explained on the Help screen on the GSR Comparative Financial Performance page.)
Here are 5 answers.
20% debt and 80% equity, or 20:80.
27% debt and 73% equity, or 27:73.
35% debt and 65% equity, or 35:65.
37% debt and 63% equity, or 37:63.
None of them.
To answer this question, we need to look at this income statement and conclude what debt and equity are.
Total Equity shows up at $90,000 so it’s easy.
But the real hard part is deciphering what debt is. Believe it or not, current liabilities are not considered “debt”. And that’s a mistake people make.
So the debt is just a long term debt of $33,000, so what?
To determine the correct ratio, use the debt ratio formula = debt/(debt+equity)
[And for note the equity ratio=equity/(debt+equity)]
Or so 33,000/(33,000+90,000)=.268 or equal to 27%. Therefore, the debt ratio is 27% and the remaining 73% is equity.
The correct answer is the second one!
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