Final answer:
The debt-equity ratio of Crystal Lake, Inc., given a total debt ratio of 0.36, is determined by solving the proportion of total debt to the sum of debt and equity. Upon calculation, the debt-equity ratio is found to be 1.78, corresponding to answer A.
Step-by-step explanation:
The question is asking to calculate the debt-equity ratio given that Crystal Lake, Inc., has a total debt ratio of 0.36. The debt-equity ratio is determined by dividing total debt by total equity. The total debt ratio is the proportion of total debt to total assets, which can also be represented as the formula total debt ratio = total debt / (total debt + total equity).
To find the debt-equity ratio from the total debt ratio, you can use the following steps:
- Express the total debt ratio as a fraction: 0.36 = total debt / (total debt + total equity).
- Let 'D' represent total debt and 'E' represent total equity. The equation becomes 0.36 = D / (D+E).
- From this, we can solve for D / E, which is the debt-equity ratio we're looking for: 0.36 = D / (D+E) => 0.36D + 0.36E = D => 0.36E = D - 0.36D => 0.36E = 0.64D => E/D = 0.64/0.36.
- Calculate E/D, which equals 1.78, representing the debt-equity ratio.
Therefore, the correct answer is A, which is a debt-equity ratio of 1.78.