The debt-to-equity ratio using market values (0.57) indicates which of the following about the relation of debt to equity?

The debt-to-equity ratio using market values (0.57) indicates which of the following about the relation of debt to equity?

• A. Debt exceeds equity
• B. Debt equals equity
• C. Debt is less than equity
• D. Debt is twice equity

Answer: (C)

The debt-to-equity ratio shows how much debt a firm uses relative to its equity financing. A market-value ratio of 0.57 means debt is 57% of the market value of equity, so debt is smaller than equity. In practical terms, for every unit of equity there is 0.57 unit of debt, indicating the firm is less leveraged. This rules out debt being greater than or equal to equity or debt being twice equity, since those scenarios would require a ratio of 1 or 2 (or higher).

The debt-to-equity ratio shows how much debt a firm uses relative to its equity financing. A market-value ratio of 0.57 means debt is 57% of the market value of equity, so debt is smaller than equity. In practical terms, for every unit of equity there is 0.57 unit of debt, indicating the firm is less leveraged. This rules out debt being greater than or equal to equity or debt being twice equity, since those scenarios would require a ratio of 1 or 2 (or higher).