Multiple Choice
On its December 31 balance sheet, XYZ Company reported total assets of \$880,000 and total liabilities of \$560,000. What is the company's debt to equity ratio?
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14. Financial Statement Analysis
Ratios: Debt to Equity Ratio
Multiple Choice
What does a debt-to-equity ratio of 0.8 indicate about a company's capital structure?
A
The company has \$0.80 in equity for every \$1.00 of debt.
B
The company has \$0.80 in debt for every \$1.00 of equity.
C
The company has \$0.80 in equity for every \$1.00 of total assets.
D
The company has \$0.80 in total assets for every \$1.00 of equity.
Verified step by step guidance1
Step 1: Understand the debt-to-equity ratio formula. The debt-to-equity ratio is calculated as \( \text{Debt-to-Equity Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}} \). It measures the proportion of debt financing relative to equity financing in a company's capital structure.
Step 2: Analyze the given ratio value. A debt-to-equity ratio of 0.8 means that for every \$1.00 of equity, the company has \$0.80 in debt. This indicates the company relies more on equity than debt for financing.
Step 3: Compare the options provided. The correct interpretation of the ratio is that the company has \$0.80 in debt for every \$1.00 of equity, as this aligns with the formula and the ratio value.
Step 4: Eliminate incorrect options. For example, the option stating '\$0.80 in equity for every \$1.00 of debt' is incorrect because it reverses the relationship. Similarly, options involving total assets are irrelevant since the debt-to-equity ratio does not directly measure assets.
Step 5: Conclude that the correct interpretation of the debt-to-equity ratio of 0.8 is that the company has \$0.80 in debt for every \$1.00 of equity, reflecting its capital structure.
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