Allen, Inc., has a total debt ratio of .20.
Explanation:
| Requirement 1: |
What is its debt-equity ratio? (Do not round intermediate calculations.Round your answer to 2 decimal places (e.g., 32.16).) |
| Debt-equity ratio | times |
| Requirement 2: |
What is its equity multiplier?(Do not round intermediate calculations.Round your answer to 2 decimal places (e.g., 32.16).) |
| Equity multiplier | times |
Explanation:
1.
2.
| To find the debt-equity ratio using the total debt ratio, we need to rearrange the total debt ratio equation. We must realize that the total assets are equal to total debt plus total equity. Doing so, we find: |
| Total debt ratio | = | Total debt / Total assets |
| .20 | = | Total debt / (Total debt + Total equity) |
| .80(Total debt) | = | .20(Total equity) |
| Total debt / Total equity | = | .20 / .80 |
| Debt-equity ratio | = | .25 |
2.
| And the equity multiplier is one plus the debt-equity ratio, so: |
| Equity multiplier | = | 1 + D/E |
| Equity multiplier | = | 1 + .25 |
| Equity multiplier | = | 1.25 |