John Davis has a debt ratio of 0.25,which tells us that John
A)is insolvent since the ratio is less than 1.0.
B)could have $10,000 in total assets and $7,500 in net worth.
C)has 25% of his income allocated to reducing debt.
D)might have $2,500 in liquid assets and $10,000 in current debts.

Question

Quizplus · Accepted Answer

The debt ratio is calculated by dividing total liabilities by total assets. A debt ratio of 0.25 means that John's total liabilities are 25% of his total assets. Using algebra, we can deduce that John's total assets are four times his total liabilities. If John's net worth is defined as his total assets minus his total liabilities, we can also deduce that his net worth is three times his total liabilities. Therefore, if John's total liabilities are $2,500, his total assets are $10,000, and his net worth is $7,500.

John Davis Has a Debt Ratio of 0