2FIN 300 Fin Ratios - Debt Ratio Suppl Ch 3_4(1) - FIN 300 Fundamentals of Finance Financial Ratios Supplement w/Extra Debt Ratio Examples Chapters 3 4

2FIN 300 Fin Ratios - Debt Ratio Suppl Ch 3_4(1) - FIN 300...

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FIN 300 Fundamentals of Finance Financial Ratios – Supplement w/Extra Debt Ratio Examples Chapters 3 & 4 1 FIN 300 - Fin Ratios
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Debt Ratios These 3 debt (or, “leverage”) ratios convey the identical info: Debt Ratio = (Total)Debt/(Total)Assets = D/A Debt-to-Equity Ratio = (Total)Debt/(Total)Equity = D/E Equity Multiplier = (Total) Assets/(Total) Equity = A/E Once you know any 1 of the 3, you can easily solve for either of the other 2 Examples follow…… FIN 300 - Fin Ratios 2
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Given D/A (Find A/E & D/E) Example: Debt Ratio = D/A = 0.5 = ½ = 50% Solve for Equity Multiplier & Debt-to-Equity: Do the algebra…. D/A = 0.5 means D=0.5A Remember the “balance sheet identity”: A = D+E (always true) Plug in the above: A = 0.5A + E Then 0.5A = E; therefore, A=2E Now A/E = Equity Multiplier = 2 It follows: D/E = 0.5A/0.5A
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