Debt to equtiy ratio

CFA Level I Corporate Finance
#1

Hey all,

I have a debt to asset ratio, but I want to convert it to the Debt to Equity ratio. How can I go about doing this? if D/D+E =.2 i want to calculate D/E

#2

Try putting in real numbers:

  • Debt (Liabilities) = 2
  • Assets = 10

So,

D/A = 2/10 = 0.2

Then,

E = 10 − 2 = 8

and,

D/E = 2/8 = 0.25

Algebraically, if r is the debt-to-assets ratio, then,

D / (D + E) = r

D = r(D + E) = _r_D + _r_E

(1 – r)D = _r_E

(1 – r)D/E = r

D/E = r / (1 – r)

#3

Students in my Principles classes often have trouble moving between the Debt to Equity Ratio, the Equity Multiplier (A/E, sometimes called the Leverage Ratio) and the Total Debt Ratio (D/A). So, I use the same approach S2000 just laid out. It’s not as"sexy" as using the formulas, but it works. And it’s pretty much as fast as using a memorized formula within about 5 seconds.

#4

Thanks for you help I can solve it by but it in a true number but what i need a general equation can apply without that, and you explain it algebraically that is very helpful for me

#5

i know this approach makes more sense than memorizing formulas and i can use it but i solve example in the curriculum and i need to apply formula it will save more time

#6

Well, I gave you the formula, so there you go.

Conceptually, it’s not that hard: if debt (properly: liabilities) is r% of assets, then equity is (100 − r)% of assets, so debt-to-equity is r / (1 − r).