If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?
A) 0
B) 0.5
C) 1.0
D) 1.5
E) 2.0

Question

Quizplus · Accepted Answer

Debt-equity ratio is calculated as total debt divided by total equity. If a firm has a debt-equity ratio of 1.0, it means that the firm has equal amount of debt and equity. Therefore, the total debt ratio is calculated as total debt divided by total assets. 
Total Debt Ratio = Total Debt / (Total Debt + Total Equity)
Total Debt Ratio = 1 / (1+1)
Total Debt Ratio = 1/2
Total Debt Ratio = 0.5. 
Hence, the option B (0.5) is the right answer.

If a Firm Has a Debt-Equity Ratio of 1