Chartered Financial Analyst (CFA) Level 1 Practice Exam

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What does the debt to capital ratio measure?

Total Debt / (Total Equity + Total Debt)
Total Debt / Total Assets
Total Debt / Net income
Total Equity / (Total Equity + Total Debt)

The correct answer is: Total Debt / (Total Equity + Total Debt)

The debt to capital ratio measures the proportion of a company's capital structure that is financed by debt. It is calculated using the formula Total Debt divided by the sum of Total Equity and Total Debt. This ratio provides insight into the degree of financial leverage a company is utilizing and helps assess the risk associated with its capital structure. A higher ratio indicates that a larger portion of the company's capital is funded by debt, which can signify increased financial risk, especially in times of economic downturns. The rationale behind this measurement lies in its ability to inform investors and stakeholders about how much of the company's financing is derived from borrowing compared to the equity contributed by shareholders. Understanding this ratio is crucial for evaluating the company's financial health and risk profile.