A Vancouver ﬁrm has a debt-equity ratio of .56. What is the total debt ratio?
A) .29
B) .36
C) .44
D) 1.44
E) 1.56

Question

Quizplus · Accepted Answer

Total debt ratio includes both debt and equity, and is calculated as Total Debt/Total Assets. The debt-equity ratio given in the question is Debt/Equity. We can use this information to calculate the equity portion of the company's financing as Equity = Debt/0.56. This means that Total Assets = Equity + Debt = (Debt/0.56) + Debt = 1.79*Debt. Therefore, Total Debt Ratio = Total Debt/Total Assets = Debt/(1.79*Debt) = 0.56/1.79 = 0.313 or 0.31 (rounded to two decimal places). The closest choice is B, which is 0.36, so it is the best choice.

A Vancouver ﬁRm Has a Debt-Equity Ratio of