If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.
Answer the following statement true (T) or false (F)
True
Rationale: Equity multiplier = Assets/Equity = 3.0, so Assets/Equity = 1/3.0 = 0.333. By definition, Equity/Assets + Debt/Assets = 1.00, so 0.333 + Debt/Assets = 1.0. Therefore, Debt/Assets = 1.0 ? 0.333 = 0.667. Thus, the statement is true.
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