Question
Calculating Leverage Ratios (LO3) Plumas Inc. has a total debt ratio of 0.46. What is its debtequity ratio? What is its equity multiplier? I've worked
Calculating Leverage Ratios (LO3) Plumas Inc. has a total debt ratio of 0.46. What is its debtequity ratio? What is its equity multiplier?
I've worked through it as following:
Total debt ratio = 0.46 = TD / TA
Substituting total debt plus total equity for total assets, we get: 0.46 = TD / (TD + TE)
Solving this equation yields: 0.46 (TE) = 0.54(TD)
Debt/equity ratio = TD / TE = 0.46 / 0.54 = 0.8519
Equity multiplier = 1 + D/E = 1.8519
I would really appreciate it if someone could step by step breakdown how they solve the algebra in this equation because I can't wrap my head around how the equation is manipulated.
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