Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 2.
A)1/3
B)1/2
C)3/5
D)2/3

Question

Quizplus · Accepted Answer

Debt-to-value ratio = Debt / (Debt + Equity)
Since debt-to-equity ratio is given as 2, it means that for every $1 of equity, the firm has $2 of debt.
Thus, debt = 2 * equity and the value of the firm (debt + equity) = 3 * equity
Therefore, Debt-to-value ratio = 2 * equity / (3 * equity) = 2/3. 
Hence, the correct answer is D.

Find the Debt-To-Value Ratio for a Firm with a Debt-To-Equity