What is the debt/equity ratio if current debt is 13,000, long-term debt is 74,000, and owner's equity is 96,800?

What is the debt/equity ratio if current debt is 13,000, long-term debt is 74,000, and owner's equity is 96,800?

• A. 0.78
• B. 0.90
• C. 1.10
• D. 1.05

Answer: (B)

To find the debt/equity ratio, you need to use the formula: \[ \text{Debt/Equity Ratio} = \frac{\text{Total Debt}}{\text{Owner's Equity}} \] Total debt is the sum of current debt and long-term debt. In this scenario, the total debt is calculated as follows: \[ \text{Total Debt} = \text{Current Debt} + \text{Long-Term Debt} \] \[ \text{Total Debt} = 13,000 + 74,000 = 87,000 \] Now, substitute the values into the debt/equity ratio formula: \[ \text{Debt/Equity Ratio} = \frac{87,000}{96,800} \] When you perform the division: \[ \text{Debt/Equity Ratio} \approx 0.90 \] This calculation confirms that the correct answer is indeed 0.90. This ratio indicates the amount of debt for every dollar of equity, providing insight into the company’s financial leverage. A ratio of 0.90 suggests that the company has a balanced approach to using debt and equity in its capital structure.

To find the debt/equity ratio, you need to use the formula:

[ \text{Debt/Equity Ratio} = \frac{\text{Total Debt}}{\text{Owner's Equity}} ]

Total debt is the sum of current debt and long-term debt. In this scenario, the total debt is calculated as follows:

[ \text{Total Debt} = \text{Current Debt} + \text{Long-Term Debt} ]

[ \text{Total Debt} = 13,000 + 74,000 = 87,000 ]

Now, substitute the values into the debt/equity ratio formula:

[ \text{Debt/Equity Ratio} = \frac{87,000}{96,800} ]

When you perform the division:

[ \text{Debt/Equity Ratio} \approx 0.90 ]

This calculation confirms that the correct answer is indeed 0.90. This ratio indicates the amount of debt for every dollar of equity, providing insight into the company’s financial leverage. A ratio of 0.90 suggests that the company has a balanced approach to using debt and equity in its capital structure.