A firm with an equity multiplier of 4.0, will have a debt ratio of ____.
A) 0.25
B) 1.00
C) 0.75
D) 4.00

Name: A firm with an equity multiplier of 4.0, will have a debt ratio of ____. A) 0.25 B) 1.00 C) 0.75 D) 4.00
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Question

Quizplus · Accepted Answer

Debt ratio is calculated as Total Debt/Total Assets. The equity multiplier is calculated as Total Assets/Total Equity. Therefore, Debt Ratio = Equity Multiplier/(Equity Multiplier - 1) = 4/(4-1) = 4/3 = 0.75. Therefore, the answer is choice C.

A Firm with an Equity Multiplier of 4