The bank lending money to ACME requires that company to have a debt-equity ratio of no more than 3.5 to 1. Another bank may calculate this type of ratio differently, e.g. as: debt / (debt + equity) * 100%. If done that way, the ratio would be:

Question

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We are given the following information:
- The bank lending money to ACME requires a debt-equity ratio of no more than 3.5 to 1.
- Another bank calculates this ratio as: debt / (debt + equity) * 100%.

Let's use the information provided in the second point to calculate the debt-equity ratio for ACME. We have:

Debt-equity ratio = debt / (debt + equity) * 100%
Debt-equity ratio = ?

We don't know the values of debt and equity for ACME, so let's use some variable. Let's say that the value of debt is D, and the value of equity is E.

Then, we can write:

Debt-equity ratio = D / (D + E) * 100%
Debt-equity ratio = ?

We know that the bank requires that this ratio be no more than 3.5 to 1. In other words:

D / E <= 3.5

We can rearrange this inequality to isolate for D:

D <= 3.5E

Now, we can substitute this inequality into our equation for the debt-equity ratio:

Debt-equity ratio = D / (D + E) * 100%
Debt-equity ratio = (3.5E) / (3.5E + E) * 100%
Debt-equity ratio = 78.57%

So, if the other bank calculates the debt-equity ratio as debt / (debt + equity) * 100%, then the ratio for ACME would be 78.57%, which corresponds to choice (C).

The Bank Lending Money to ACME Requires That Company to Have