121012

Leverage, Equity Multiplier, Debt to Assets Ratios

Crina Pungulescu

Notation

D
E

- debt to equity ratio, leverage

A
E

- asset to equity ratio, equity multiplier

D
A

- debt to assets ratio

Knowing that A = D + E, we can check that the following relationships are true:

A
E

E+D
E

D
A

D
E+D

D
E

D
A
E
A

=
=

E
E

D
E

D
D
E+D
D

D
A
AD
A

=1+

D
E,

E
D
D+D

D
A
A
D
AA

hence
1
E
D +1

D
A
1 D
A

D
E

1
D
E

A
E

1
+1

Practice exercises:
D
E

D
A

A
E

0.50

0.33

1.50

1.00

0.50

2.00

0.25

0.20

1.25

2.00

0.67

3.00

0.10

0.09

1.10

0.75

0.43

1.75

0.20

0.17

1.20

Toulouse

Business School - Barcelona Campus, Department of Economics - Finance and Law, C/ Trafalgar, 10, 08010

Barcelona, Spain, email: c.pungulescu@tbs-education.es, phone: +34 933 100 111, fax: +34 933 100 228.