Pearly Gates Inc.has a debt-to-assets ratio of 0.55.This means that:
A) stockholders' equity is 55% of total assets.
B) stockholders' equity is 45% of total assets.
C) investors provide 55% of the company's financing.
D) liabilities are 55% of equity.

Question

Quizplus · Accepted Answer

The debt-to-assets ratio is calculated by dividing the company's total debt by its total assets.

Debt-to-assets ratio = Total Debt / Total Assets

Given that Pearly Gates Inc. has a debt-to-assets ratio of 0.55, it means that the company's total debt is 55% of its total assets.

So, the remaining portion of assets that belongs to the company's shareholders is:

Shareholders' equity = 1 - Debt-to-assets ratio
                      = 1 - 0.55
                      = 0.45 or 45%

Therefore, the correct answer is B, which states that stockholders' equity is 45% of total assets.