**Exercise 10-16 (Algo) Applying Debt-to-Equity Ratio LO A2**Montclair Company is considering a project that will require a $620,000 loan. It presently has total liabilities of $160,000 and total assets of $680,000.1. Compute Montclair’s (a) current debt-to-equity ratio and (b) the debt-to-equity ratio assuming it borrows $620,000 to fund the project.2. If Montclair borrows the funds, does its financing structure become more or less risky?**Table: Calculation of Debt-to-Equity Ratio**| Choose Numerator: | Choose Denominator: | Debt-to-Equity Ratio ||-------------------|---------------------|----------------------|| 1. (a) | | || 1. (b) | | || 2. If Montclair borrows the funds, does its financing structure become more or less risky? | |(Note: The table includes fields to calculate the debt-to-equity ratio before and after borrowing. The first row is for current calculation, and the second row assumes after borrowing. The last row asks about the risk assessment.)

Liabilities are debts, while assets are the things that a company owns. Both are shown on a company's balance sheet, a financial statement that details its financial situation. Equity, also known as an owner's net worth, is calculated by deducting liabilities from assets.Answer a. Current debt-to-equity ratio can be computed as: Debt to equity ratio=Total liabilities/Total equity Equity=Assets-Liabilities =$680,000-$160,000 =$520,000 Debt to equity ratio=$160,000/$520,000 =0.30:1 Answer b. Debt to equity ratio if $620,000 is borrowed for funding the project can be computed as : As $620,000 is borrowed both the liabilities and assets would increase by $620,000 Liabilities=$160,000+$620,000=$780,000 Assets=$680,000+$620,000=$1,300,000 Equity=$1,300,000-$780,000=$520,000 Debt to equity ratio=$780,000/$520,000 =1.50 or 150% Final Answer: Choose Numerator / Choose Denominator Total liabilities / Total Equity = Debt to Equity Ratio 1. (a) $160,000 / $520,000 = 0.30:1 1. (b) $780,000 / $520,000 = 1.50:1 Answer 2. If funds are borrowed, the amount of equity remains the same, but the amount of debt increases. If the debt increases in the capital structure, the financing gets riskier. Since the debt to equity ratio is larger after borrowing the funds, the financing structure becomes riskier.