If the debt ratio is 0.5, what is the debt-equity ratio? (Assume no leases.)
A)0.5
B)1.00
C)2.00
D)4.00

Question

Quizplus · Accepted Answer

Debt ratio is total debt divided by total assets. So if debt ratio is 0.5, it means that for every $1 in assets, the company has $0.50 in liabilities.

Now, debt-equity ratio is the total debt divided by total equity. We can find the equity ratio by subtracting the debt ratio from 1:

Equity ratio = 1 - Debt ratio 
Equity ratio = 1 - 0.5 
Equity ratio = 0.5

Therefore, debt-equity ratio = Debt ratio / Equity ratio 
Debt-equity ratio = 0.5 / 0.5 
Debt-equity ratio = 1

Hence, the correct answer is B) 1.00.

If the Debt Ratio Is 0