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8 September, 19:42

If a firm has a debt ratio of 54%, what is the firm's debt to equity ratio?

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  1. 8 September, 19:45
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    If a firm has a debt ratio of 54%, then the firm's debt to equity ratio is 117%

    Explanation:

    The Debt Ratio is obtained dividing Liabilities / Assets. Then, a result of 54% means that 54% of the asset is composed by liabilities.

    Liabilities 54

    Assets 100

    Debt Ratio = 54%

    By the general accounting formula we know that

    Assets = Liabilities+Equity. Then,

    Assets (100) = Liabilities (54) + Equity (46)

    If the Debt to equity ratio is calculated by the division of liabilities/Equity - Then:

    Liabilities 54

    Equity 46

    Debt to Equity Ratio = 117%

    This means that for 1 dollar on the Equity the company has 1 dollar plus 17% or 17 cents on the Liabilities.
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