A firm which has an equity multiplier of 4.0 will have a debt ratio of
A) 4.00
B) 3.00
C) 1.00
D) 0.75
E) 0.25

Question

Quizplus · Accepted Answer

Equity multiplier = Total assets/Total equity
Debt ratio = Total debt/Total assets

We can use the formula: 
Equity multiplier = 1 + Debt ratio

Substituting the given equity multiplier of 4.0: 
4.0 = 1 + Debt ratio

Rearranging and solving for the debt ratio: 
Debt ratio = 4.0 - 1 = 3.0

Therefore, the answer is D) 0.75, as the debt ratio is 3.0 or 75%.

A Firm Which Has an Equity Multiplier of 4