What is the debt ratio for a firm with an equity multiplier of 3.5?
A) 44.09 percent
B) 58.51 percent
C) 66.25 percent
D) 71.43 percent

Question

Quizplus · Accepted Answer

The debt ratio is calculated as (Total Debt / Total Assets). The equity multiplier, which is given as 3.5, is calculated as (Total Assets / Total Equity). This implies that for every $1 of equity, there are $3.5 of assets. Since the equity multiplier is the inverse of the equity ratio (Total Equity / Total Assets), we can find the equity ratio as 1 / 3.5 = 0.2857 or 28.57%. Therefore, the debt ratio, which is 1 - the equity ratio, is 1 - 0.2857 = 0.7143 or 71.43%.

What Is the Debt Ratio for a Firm with an Equity