If the debt ratio is 0.5, what is the debt-equity ratio? (Assume no leases.)
A)0.5
B)1
C)2
D)4

Question

Quizplus · Accepted Answer

Debt ratio is the percentage of total assets financed by debt. 
Debt Ratio = Total Debt / Total Assets 
0.5 = Total Debt / Total Assets

We know that: 
Debt-to-Equity Ratio = Total Debt / Total Equity

We need to find Total Equity. 
Total Equity = Total Assets - Total Debt

Substituting the values we have: 
Total Equity = 1 - 0.5 = 0.5

Now, 
Debt-to-Equity Ratio = Total Debt / Total Equity 
= 0.5 / 0.5 = 1

Therefore, the debt-equity ratio is 1 when the debt ratio is 0.5.

If the Debt Ratio Is 0