An equity multiplier of 3 implies a debt ratio of:

Name: An equity multiplier of 3 implies a debt ratio of:
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Question

Quizplus · Accepted Answer

Equity multiplier = Total assets / Total equity
Let the debt ratio be x, then the equity multiplier = (Total assets / Total equity) = (Total assets / Total assets - Total Debt) = 1 + (Total debt / Total equity) = 1 + Debt ratio
Hence, 3 = 1 + Debt ratio
Debt ratio = 3 - 1
Debt ratio = 2
Therefore, the debt ratio is 2/3 or 66.67%. Hence, the correct choice is B.

An Equity Multiplier of 3 Implies a Debt Ratio Of