Question

A firm has a debt-to-equity ratio of 0.50. Its cost of debt is 10%. Its overall cost of capital is14%. What is its cost of equity if there are no taxes?

Answer 1

The formula for calculating the debt-to-equity ratio is to take a company's total liabilities and divide them by its total shareholders' equity. A good debt-to-equity ratio is generally below 2.0 for most companies and industries.

What type of ratio is debt-to-equity?

leverage

The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.

What does a debt-to-equity ratio of 2 mean?

A debt-to-equity ratio of 2 means a company relies twice as much on debt to drive growth than it does on equity, and that creditors, therefore, own two-thirds of the company's assets.

Learn more about debt-to-equity here:

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