Question

Coulter Supply has a total debt ratio of .46. What is the equity multiplier? Select one: a. .89 b. 1.17 c. 1.47 d. 1.85 e. 2.17

Answer 1

Answer:

Option D.

Step-by-step explanation:

The formula for total debt ratio is

$\text{Total debt ratio}=\dfrac{\text{Total assets - Total Equity}}{\text{Total assets}}$

It can be rewritten as

$\text{Total debt ratio}=1-\dfrac{\text{Total Equity}}{\text{Total assets}}$     .... (1)

We know that,

$\text{ Equity multiplier}=\dfrac{\text{Total Equity}}{\text{Total assets}}$          ... (2)

Using (1) and (2) we get

$\text{Total debt ratio}=1-\dfrac{1}{\text{Equity multiplier}}$

Substitute total debt ratio=0.46 in the above equation.

$0.46=1-\dfrac{1}{\text{Equity multiplier}}$

$0.46-1=-\dfrac{1}{\text{Equity multiplier}}$

$-0.54=-\dfrac{1}{\text{Equity multiplier}}$

$\text{Equity multiplier}=-\dfrac{1}{-0.54}$

$\text{Equity multiplier}=1.85185185$

$\text{Equity multiplier}\approx 1.85$

Therefore, the correct option is D.