Zoe's Dog Toys, Inc. reported a debt to equity ratio of 0.5 times at the end of 2018. If the firm's total assets at year-end are $50 million, how much of their assets is financed with equity?

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Quizplus · Accepted Answer

The debt to equity ratio is defined as total debt divided by total equity. Given a ratio of 0.5, this means that for every $1 of equity, there is $0.5 of debt. If the total assets are $50 million and we assume that the company only uses debt and equity to finance these assets (Assets = Debt + Equity), we can set up the equation: Debt/Equity = 0.5. Rearranging this equation to solve for Equity in terms of Debt gives Equity = 2 * Debt. Since Assets = Debt + Equity, and Equity is 2 times Debt, it implies that Equity is 2/3 of the total assets. Therefore, 2/3 of $50 million is $33.33 million, which means $33.33 million of the assets are financed with equity.