Compute the debt-to-total-value ratio for a firm that has a debt-to-equity ratio of 2.
A)1/3
B)2/5
C)3/2
D)2/3

Question

Quizplus · Accepted Answer

The debt-to-total-value ratio is the ratio of total debt to the total value of the firm, which includes both debt and equity.

If the debt-to-equity ratio is 2, it means that the total amount of debt is twice the amount of equity.

Therefore, the total value of the firm is equal to the sum of debt and equity, which can be represented as:

Total value = Debt + Equity

Since the debt is twice the equity, we can substitute 2E for D:

Total value = 2E + E

Total value = 3E

Now, we can calculate the debt-to-total-value ratio:

Debt-to-total-value ratio = Debt / Total value

Debt-to-total-value ratio = 2E / 3E

Debt-to-total-value ratio = 2/3

Therefore, the answer is D: 2/3.

Compute the Debt-To-Total-Value Ratio for a Firm That Has a Debt-To-Equity