Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 4.

Question

Quizplus · Accepted Answer

Debt-to-value ratio can be calculated as Total Debt/Total Value of the firm. Given the Debt-to-Equity ratio = 4, we can assume that Debt/(Debt+Equity) = 4/5 or 0.8. Let us assume that the Total Value of the firm is 1. This means Total Debt is 0.8 and Equity is 0.2. Therefore, Debt-to-Value ratio = 0.8/1 = 0.8. Option C has the ratio of ⁴ (0.8) in the numerator and ₅ (1) in the denominator, which matches our calculation.

Find the Debt-To-Value Ratio for a Firm with a Debt-To-Equity