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a firm has total assets of $79,600, cash of $25,000 and a debt-equity ratio of 0.25....

a firm has total assets of $79,600, cash of $25,000 and a debt-equity ratio of 0.25. What is the equity multiplier?

Solutions

Expert Solution

Debt- equity = 0.25

It means that debt is 25% of equity

So, let debt = 0.25

Equity = 1

Debt weightage = 0.25 / ( 1 + 0.25)

= 0.20 or 20%

Equity = 1 - debt weightage

= 1 - 0.20

= 0.80

We know that assets = debt + equity

So, equity = assets × equity weightage

= 79600 × 80%

= 63680

Equity multiplier = Total assets / equity

= 79600 / 63680

= 1.25

So, the equity multiplier is 1.25

jeff jeffy answered 2 years ago
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