Lowe’s Companies Inc., a major competitor of The Home Depot in the home improvement business, operates over 1,700 stores

Lowe’s Companies Inc., a major competitor of The Home Depot in the home improvement business, operates over 1,700 stores. Lowe’s recently reported the following balance sheet data (in millions):

                                 Year 2     Year 1
Total assets            $33,699    $33,005
Total liabilities        15,587     13,936

a. Determine the total stockholders’ equity as of 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?

Answer:
a.
Year 2:  $18,112  ($33,699 – $15,587)
Year 1:  $19,069  ($33,005 – $13,936)

b.
Year 2:  0.86  ($15,587 ÷ $18,112)
Year 1:  0.73  ($13,936 ÷ $19,069)

c.
The risk for creditors has increased from 0.73 in Year 1 to 0.86 in Year 2. In both years, creditors have less at stake in Lowe’s than do stockholders, since the ratio is less than 1.

d.
Lowe’s ratio of liabilities to stockholders’ equity is less than 1. In comparison, The Home Depot’s ratio of liabilities to stockholders’ equity is greater than 1 for Year 2 and Year 1. Thus, the creditors of The Home Depot are more at risk than are the creditors of Lowe’s.