Question

Which one of the following statements is correct?

If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.

If the equity multiplier is greater than 2, then the debt-equity ratio must be greater than 1.0.

Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5

The debt-equity ratio can be computed as 1 plus the equity multiplier.

An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.

Answer 1

If debt ratio is greater than 0.5, it means debt is more than equity and hence, debt equity ratio will be greater than 1

Equity Multiplier = Total Assets/Total Equity. If it is greater than 2, then debt is more than equity and hence, debt equity ratio must be greater than 1

Higher the times interest ratio, more favorable it is for the lenders

Debt Equity ratio = Debt/Equity

Equity multiplier of 1.2 means 1.2 of assets for every $1 in equity

Hence, the answer is

If the equity multiplier is greater than 2, then the debt-equity ratio must be greater than 1.0.