Crystal Lake, Inc., has a total debt ratio of 0.24. Its debt-equity ratio is therefore times and its equity multiplier is times.
How do you figure out the number you divide 0.24 by to get the DE ratio?
I have a sample of this problem that just shows the number used in the sample problem but dosent show how to get it.
To figure out the number you divide 0.24 by to get the Debt-Equity (DE) ratio, you need to understand the relationship between the total debt ratio and the DE ratio.
The total debt ratio is calculated by dividing the total debt of a company by its total assets. Mathematically, it can be represented as:
Total Debt Ratio = Total Debt / Total Assets
The DE ratio, on the other hand, represents the proportion of a company's total debt to its total equity or shareholders' equity. Mathematically, it can be expressed as the reciprocal of the equity multiplier, which is defined as:
Equity Multiplier = Total Assets / Total Equity
By rearranging the equation for the equity multiplier, we get:
Total Equity = Total Assets / Equity Multiplier
Substituting the value of total assets into the total equity equation, we can express the DE ratio as:
DE Ratio = Total Debt / Total Equity = Total Debt / (Total Assets / Equity Multiplier)
To find the value you divide 0.24 by, you need to rearrange this equation to isolate the DE ratio:
DE Ratio = Total Debt / (Total Assets / Equity Multiplier)
DE Ratio = Total Debt * Equity Multiplier / Total Assets
Now, compare this expression to the equation for the total debt ratio:
Total Debt Ratio = Total Debt / Total Assets
We can see that the divisor in the DE ratio equation is the same as the total assets in the total debt ratio equation. Therefore, to find the number you divide 0.24 by to get the DE ratio, you take the reciprocal of the total assets ratio.
In other words, you divide 1 by 0.24:
DE Ratio = 1 / 0.24 = 4.17
Thus, the DE ratio for Crystal Lake, Inc. is 4.17.