Question

Debt to total assets of a firm is 0.2. The debt to equity ratio would be _______.

• A. 0.8
• B. 0.25
• C. 1
• D. 0.75

Answer 1

The correct option is B 0.25

Debt to Equity ratio is a financial ratio indicating the relative proportion of shareholders' equity & debt which is used to finance a company's assets. Closely related to leveraging, the ratio is also known as risk,gearing or leverage. Here we are given that Debt to total Assets of a firm is 0.2. The formula debt to Equity is Debt/Equity & we have given debt to total Assets as 0.2. We can consider Total Assets as Debt+Equity. Now debt + Equity=1, substituting debt=0.2 we get Equity=0.8. Finally using Debt to Equity formula=0.25