Answer:
The percentage of the firm that is financed by debt is:
40%
= $2 ($5 - $3) million/$5 million
= 40%
Explanation:
The long-term debt financing is the difference between the total assets of the firm and the value of the firm's equity. The debts/assets ratio is the financial leverage that the firm employs in running the business. The implication is that creditors can lay claim to 40% of the assets of the firm since the assets are financed 40% from debts. The remaining 60% is financed by Stockholders' Equity.
