Lowe’s Companies Inc., a major competitor of The Home Depot in the home improvement business, operates over 1,800 stores

Lowe’s Companies Inc., a major competitor of The Home Depot in the home improvement business, operates over 1,800 stores. Lowe’s recently reported the following balance sheet data (in millions):

                                        Year 2 | Year 1
Total assets                   $31,827 | $32,732
Total liabilities               21,859 | 20,879

a. Determine the total stockholders’ equity at the end of Years 2 and 1.

b. Determine the ratio of liabilities to stockholders’ equity for Year 2 and Year 1. Round to two decimal places.

c.  What conclusions regarding the risk to the creditors can you draw from (b)?

d. Using the balance sheet data for The Home Depot in Exercise 1-26, how does the ratio of liabilities to stockholders’ equity of Lowe’s compare to that of The Home Depot?

Answers:
a.
Year 2:  $9,968  ($31,827 – $21,859)
Year 1:  $11,853  ($32,732 – $20,879)

b.
Year 2:  2.19  ($21,859 ÷ $9,968)
Year 1:  1.76  ($20,879 ÷ $11,853)

c.
The risk for creditors has increased from 1.76 in Year 1 to 2.19 in Year 2.

d.
The Home Depot’s ratio of liabilities to stockholders’ equity (3.29 in Year 2 and 2.24 in Year 1) is more in both years than is Lowe’s ratio of liabilities to  stockholders’ equity (2.19 in Year 2 and 1.76 in Year 1). Thus, the risk to creditors of The Home Depot is slightly more than that of Lowe’s.