Leverage ratio: Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio?

Question

Quizplus · Accepted Answer

The equity multiplier is equal to the total assets divided by total equity.

Equity Multiplier = Total Assets / Total Equity

2.47 = Total Assets / Total Equity

Therefore, Total Equity = Total Assets / 2.47

The debt-to-equity ratio is equal to total debt divided by total equity.

Debt-to-Equity Ratio = Total Debt / Total Equity

Since we don't have any information about the firm's total debt, we can't calculate the debt-to-equity ratio directly. 
However, we can use the equity multiplier and our equation for total equity to solve for the debt-to-equity ratio in terms of the equity multiplier.

Debt-to-Equity Ratio = (Total Assets - Total Equity) / Total Equity 
Debt-to-Equity Ratio = (Total Assets / Total Equity) - 1 
Debt-to-Equity Ratio = Equity Multiplier - 1

Debt-to-Equity Ratio = 2.47 - 1 = 1.47

Therefore, the debt-to-equity ratio is 1.47.

Leverage Ratio: Your Firm Has an Equity Multiplier of 2