Question

Bello, Inc., has a total debt ratio of .82.

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

Given: Total Debt ratio = 0.82

(a)To calculate Debt to Equity ratio -

Debt Ratio = (Short term liabilities + Long term liabilities)/ Total Assets   

Again,Total Assets = Shareholders' Equity + Total Liabilities

So, Debt Ratio = Debt/(Equity + Debt) [Total Assets = Shareholders' Equity + Total liabilities(debt)]

0.82 = Debt/(Equity + Debt)

0.82 Equity + 0.82Debt= Debt

0.82 Equity = 0.18 Debt

Debt to Equity = 0.82/0.18

Debt to Equity = 4.56

(b) Equity Multiplier = Total Assets/Total Stockholders' Equity

Equity Multiplier = (Equity + Debt)/Equity

Equity Multiplier = 1 + (Debt/Equity)

Equity Multiplier = 1 + 4.56

Equity Multiplier = 5.56