Question

Queen, Inc., has a total debt ratio of .46. (a) What is its debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) (b) What is its equity multiplier? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

(a) 0.8519 or 85.19%

(b) 1.85

Explanation:

The debt ratio plus the debt ratio must equal 100%, therefore, the equity ratio is:

$E = 1-0.46 = 0.54$

(a) The debt-equity ratio is given by:

$DER = \frac{D}{E}=\frac{0.46}{0.54}  \\DER=0.8519=85.19%$

(b) The equity multiplier is given by total assets (1) divided by the equity ratio (0.54)

$EM = \frac{1}{0.54}\\EM=1.85$

Answer 2

The ratio of contribution of owners fund to that of borrowed funds in the capital of an entity is called as Debt Equity Ratio. The debt ratio and equity ratio are combined to form a capital of a company.

If the Debt ratio is given as .46 then the equity ratio can be said as 1- .46.

i.e. equity ratio is 0.54.

Calculations

$\begin{aligned}\rm Debt\:Equity\:ratio&= \dfrac{Debt}{Equity} \times 100\\\rm Debt\:Equity\:ratio&=\dfrac{.46}{.54} \times 100\\\rm Debt\:Equity\:ratio&= 0.8519 \times 100\\\\\rm Debt\:Equity\:ratio&= 85.19\end$

Equity Multiplier

The equity multiplier measures the assets that are financed by owners equity rather than borrowed funds and is calculated by assets upon equity ratio.

Calculations

$\begin{aligned}\rm\: Equity \:Multiplier&= \dfrac{Total Assets}{Equity\:ratio} \\\rm\: Equity \:Multiplier&=\dfrac{1}{.54} \\\rm\: Equity \:Multiplier&= 1.85 \end$

Therefore the debt equity ratio of Queen inc. is 85.19 and the equity multiplier is 1.85.

Learn more about ratios here:

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