Vigo Vacations has an equity multiplier of 2.5. The company\u2019s assets are financed with some combination of long-term debt and common equity. What is the company\u2019s debt ratio?<\/p>\n\n\n\n
The correct answer and explanation is:<\/mark><\/strong><\/p>\n\n\n\n To calculate the debt ratio<\/strong>, we start with the equity multiplier<\/strong> formula: Equity Multiplier=Total AssetsTotal Equity\\text{Equity Multiplier} = \\frac{\\text{Total Assets}}{\\text{Total Equity}}<\/p>\n\n\n\n The equity multiplier given is 2.5<\/strong>, so: Total AssetsTotal Equity=2.5\\frac{\\text{Total Assets}}{\\text{Total Equity}} = 2.5<\/p>\n\n\n\n This implies that for every dollar of equity, there are $2.50 of assets. Rewriting this: Total Assets=2.5\u00d7Total Equity\\text{Total Assets} = 2.5 \\times \\text{Total Equity}<\/p>\n\n\n\n The relationship between assets, equity, and debt is: Total Assets=Total Equity+Total Debt\\text{Total Assets} = \\text{Total Equity} + \\text{Total Debt}<\/p>\n\n\n\n Substituting Total Assets=2.5\u00d7Total Equity\\text{Total Assets} = 2.5 \\times \\text{Total Equity}: 2.5\u00d7Total Equity=Total Equity+Total Debt2.5 \\times \\text{Total Equity} = \\text{Total Equity} + \\text{Total Debt}<\/p>\n\n\n\n Rearranging to solve for debt in terms of equity: Total Debt=2.5\u00d7Total Equity\u2212Total Equity\\text{Total Debt} = 2.5 \\times \\text{Total Equity} – \\text{Total Equity} Total Debt=1.5\u00d7Total Equity\\text{Total Debt} = 1.5 \\times \\text{Total Equity}<\/p>\n\n\n\n Now, the debt ratio<\/strong> formula is: Debt Ratio=Total DebtTotal Assets\\text{Debt Ratio} = \\frac{\\text{Total Debt}}{\\text{Total Assets}}<\/p>\n\n\n\n Substitute Total Debt=1.5\u00d7Total Equity\\text{Total Debt} = 1.5 \\times \\text{Total Equity} and Total Assets=2.5\u00d7Total Equity\\text{Total Assets} = 2.5 \\times \\text{Total Equity}: Debt Ratio=1.5\u00d7Total Equity2.5\u00d7Total Equity\\text{Debt Ratio} = \\frac{1.5 \\times \\text{Total Equity}}{2.5 \\times \\text{Total Equity}} Debt Ratio=1.52.5=0.6\u2009or\u200960%\\text{Debt Ratio} = \\frac{1.5}{2.5} = 0.6 \\, \\text{or} \\, 60\\%<\/p>\n\n\n\n The equity multiplier of 2.5 indicates that the company has $2.50 in assets for every $1.00 of equity. The remaining portion of the assets is financed through debt. By breaking down the relationship between assets, equity, and debt, we determined that 60% of the company\u2019s assets are financed through debt, while the remaining 40% are financed through equity.<\/p>\n\n\n\n The debt ratio of 60% shows that the company relies significantly on debt to finance its operations. A higher debt ratio can indicate greater financial leverage, which may boost returns in good times but also increases risk during downturns.<\/p>\n","protected":false},"excerpt":{"rendered":" Vigo Vacations has an equity multiplier of 2.5. The company\u2019s assets are financed with some combination of long-term debt and common equity. What is the company\u2019s debt ratio? The correct answer and explanation is: To calculate the debt ratio, we start with the equity multiplier formula: Equity Multiplier=Total AssetsTotal Equity\\text{Equity Multiplier} = \\frac{\\text{Total Assets}}{\\text{Total Equity}} The equity multiplier […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-180490","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/180490","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=180490"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/180490\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=180490"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=180490"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=180490"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Explanation:<\/h3>\n\n\n\n