Question

Fincher, Inc., has a total debt ratio of .64.

1. What is its debt–equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
2. What is its equity multiplier? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

1. Debt–equity ratio = 1.78

2. Equity multiplier = 2.78

Step-by-step explanation:

Total Debt Ratio = 0.64

Total Debt Ratio = Total Debt / Total Asset

0.64 = Total Debt / Total Asset

Considering asset = 1

0.64 = Total Debt / 1

Total Debt = 0.64 x 1

Total Debt = 0.64

According Accounting Equation

Assets = Equity + Liabilities

Equity = Assets - Liabilities

Equity = 1 - 0.64

Equity = 0.36

Now Calculate Debt equity ratio

Debt Equity Ratio = Total Debt / Total Equity

Debt Equity Ratio = 0.64 / 0.36

Debt Equity Ratio = 1.78 = 178%

Equity Multiplier = Total Asset / Total Equity

Equity Multiplier = 1 / 0.36 = 2.78 = 278%