1.Question 1If a firm has a debt-to-equity ratio of 20%, then a firmborrows $1 for every $____ in equity.

Break Down the Problem

1. Identify the meaning of the debt-to-equity ratio.
2. Determine the implication of a 20% debt-to-equity ratio.
3. Calculate how much equity corresponds to $1 borrowed.

Relevant Concepts

1. The debt-to-equity ratio is defined as: $\text{Debt-to-Equity Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}}$
2. Given that the debt-to-equity ratio is 20%, we can express this as: $\frac{\text{Total Debt}}{\text{Total Equity}} = 0.2$

Analysis and Detail

1. Let $D$ be the total debt and $E$ be the total equity.
2. From the ratio, we have: $D = 0.2E$
3. If $D = 1$ (the amount borrowed), then: $1 = 0.2E$
4. Solving for $E$: $E = \frac{1}{0.2} = 5$

Verify and Summarize

Based on our analysis, for every $1 borrowed, the firm has$5 in equity.

Final Answer

A firm borrows $1 for every$5 in equity.