If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

Name: If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.
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Question

Quizplus · Accepted Answer

Equity multiplier = Assets/Equity = 3.0, so Assets/Equity = 1/3.0 = 0.333.By definition, Equity/Assets + Debt/Assets = 1.00, so
0.333 + Debt/Assets = 1.0.therefore, Debt/Assets = 1.0 - 0.333 = 0.667.thus, the statement is true.

If a Firm Finances with Only Debt and Common Equity