From the data: total assets of 5 million and total liabilities of 3 million. What is the debt ratio?

From the data: total assets of 5 million and total liabilities of 3 million. What is the debt ratio?

• A. 0.60
• B. 0.40
• C. 0.75
• D. 0.50

Answer: (A)

Debt ratio measures how much of a company’s assets are financed with debt. It’s calculated by dividing total liabilities by total assets. With total assets of 5 million and total liabilities of 3 million, the debt ratio is 3/5 = 0.6, or 60%. This reflects the level of leverage: 60% of assets are funded by debt. The other values would require different liability amounts (for example, 0.4 would require 2 million liabilities, 0.50 would require 2.5 million liabilities, and 0.75 would require 3.75 million liabilities), which aren’t consistent with the given data.

Debt ratio measures how much of a company’s assets are financed with debt. It’s calculated by dividing total liabilities by total assets. With total assets of 5 million and total liabilities of 3 million, the debt ratio is 3/5 = 0.6, or 60%. This reflects the level of leverage: 60% of assets are funded by debt. The other values would require different liability amounts (for example, 0.4 would require 2 million liabilities, 0.50 would require 2.5 million liabilities, and 0.75 would require 3.75 million liabilities), which aren’t consistent with the given data.