CFP Certified Financial Planner Test Prep

Category - Accounting

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With all her recent acquisitions, Big Bertha needs to take a good look at her debt to equity ratio. If she owes $100,000 in long term debt, $50,000 in short term loans, and has $1,000,000 in shareholder equity, what is her debt to equity ratio?

Explanation

Answer - A - The debt to equity ratio is .15. This is calculated by taking total debt and dividing it by shareholder equity. In this case: 150,000 / 1,000,000.

Key Takeaway: The debt to equity ratio is a formula: Total Debt / Shareholder Equity. It is a measurement of a company’s financial leverage.

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