The debt-to-equity ratio compares a company's total liabilities with its shareholder equity.

• A. Market capitalization
• B. Total assets
• C. Shareholder equity
• D. Net income

Answer: (C)

Financial leverage and risk are evaluated by the debt-to-equity ratio, which compares the funds a company owes to creditors (liabilities) with the funds provided by owners (shareholder equity). The statement highlights that this ratio uses liabilities in relation to shareholder equity, so the component that fits this description is shareholder equity. The ratio is typically calculated as total liabilities divided by shareholder equity, showing how much debt the company uses to finance its assets relative to the owners’ stake. Market capitalization, total assets, and net income don’t define this ratio, as they represent different concepts: market value of equity, the sum of everything the company owns, and earnings, respectively.