If the equity multiplier is 2.0, the debt ratio must be 0.5.

Question

Quizplus · Accepted Answer

Equity multiplier = Total assets / Total equity 
We know equity multiplier = 2.0 
Therefore, Total assets / Total equity = 2.0

Let's assume total assets as X and total equity as Y 
So, X / Y = 2.0 
Multiplying both sides by Y, we get: 
X = 2Y

Debt Ratio = Total Debt / Total Assets 
We need to find the debt ratio.

Firstly, Total Debt + Total Equity = Total Assets 
From this equation, we can find Total Debt as: 
Total Debt = Total Assets - Total Equity

Total Assets = X (from the above equation) 
Total Equity = Y

Substituting the above values, we get:

Total Debt = X - Y

Debt Ratio = Total Debt / Total Assets 
= (X - Y) / X

To simplify the equation further, let's substitute X = 2Y (from the equation X / Y = 2.0)

Debt Ratio = (2Y - Y) / 2Y 
= Y / 2Y 
= 0.5

Therefore, we get a debt ratio of 0.5, which is equal to Total Debt / Total Assets when the equity multiplier is 2.0. Hence, the answer is A) True.

If the Equity Multiplier Is 2