If a firm has a debt-equity ratio of 1.6, then its total debt ratio must be?
To determine the total debt ratio, we need to understand the relationship between the debt-equity ratio and the total debt ratio.
The debt-equity ratio is a measure of the proportion of debt and equity in a company's capital structure. It is calculated by dividing total debt by total equity. In this case, if the firm has a debt-equity ratio of 1.6, it means that the firm has 1.6 units of debt for every 1 unit of equity.
To calculate the total debt ratio, we need to consider the proportion of total debt in relation to the total assets. The total debt ratio measures the extent to which a company's assets are financed by debt. It is calculated by dividing total debt (liabilities) by total assets.
Now, to find the total debt ratio based on the debt-equity ratio, we can follow these steps:
1. Assume the total equity as 1.
2. Multiply the debt-equity ratio by the assumed total equity to find the total debt.
- Total Debt = Debt-Equity Ratio * Total Equity
- Total Debt = 1.6 * 1 = 1.6
3. Add the total debt obtained to the total equity assumed to get the total assets.
- Total Assets = Total Debt + Total Equity
- Total Assets = 1.6 + 1 = 2.6
4. Finally, calculate the total debt ratio by dividing total debt by total assets.
- Total Debt Ratio = Total Debt / Total Assets
- Total Debt Ratio = 1.6 / 2.6 = 0.6154 or 61.54%.
Thus, the total debt ratio for the firm with a debt-equity ratio of 1.6 is approximately 61.54%.