Calculate the company’s

**debt ratio**using this accounting information?

**Accounting Answer:**

If company has an equity multiplier of 2.5, this means that the company has $2.5 of asset against every dollar of equity that is issued in the form of common stock.

The first step is to calculate the Equity Ratio of the company:

Formula of Equity Ratio is : 1/Equity Multiplier

Equity Ratio = 1 / 2.5 = 0.40 = 40%

Therefore, if the company's assets are 40% financed by common equity, then the remaining 60% of assets are financed by debt, thus debt equity ratio will be 0.60 or 60%. That is the correct answer to the accounting problem.

## No comments:

Post a Comment