Applying the Accounting Equation andComputing FinancingProportions

Use the accounting equation to compute the missing financial amounts.

($ millions)Assets=Liabilities+EquityHewlett-Packard$113,331$74,389$Answer

General Mills$17,875$Answer

$5,417Target$Answer

$30,394$13,712

Which of these companies is more owner-financed?

Hewlett-Packard

General Mills

Target

Which of these companies is more nonowner-financed?General Mills

Hewlett-Packard

Target

The most likely explanation of why the proportion of owner financing might differ across these three businesses is that:Because net income increases equity, we expect to see more profitable companies with a greater proportion of equity than debt.

Equity and debt financing are equally risky and, therefore, we expect the proportion of debt and equity to be approximately equal in equilibrium.

Companies tend to utilize more owner financing because it is less costly.

Companies that face greater uncertainty of cash flows tend to utilize more equity in their capital structure.