Question

Baldwin has a leverage of 1.82 This means that: (Assume leverage is calculated as Assets/Equity)

Select: 1

$1.82 of assets is funded with $1.00 of debt and $0.82 of equity. $1.82 of assets is funded with $1.00 of equity and $0.82 of debt. Assets are funded with 82% debt. Assets are funded with 82% equity.

Answer 1

Correct answer: $1.82 of assets is funded with $1.00 of equity and $0.82 of debt.

Working:

Above option can be obtained by assuming equity as $1 to achieve leverage ratio of 1.82:

Leverage = Assets / Equity

Leverage = (Equity + Debt) / Equity

Now,

Debt + Equity = 1.82

0.82 + 1 = 1.82

Hence, leverage is 1.82