Question

QUESTION: The financial leverage multiplier is the ratio of the firm's total assets to stockholders' equity.

ANSWER OPTIONS: True False You need to specifically state IN THE SUBJECT LINE if the answer is TRUE or FALSE.

EXAMPLES OF INADEQUATE RESPONSES: “I think the answer is False.” OR “The correct answer is “C.”

Postings must be no less than 200 words in length to be considered. Any posting less than 200 words in length will not be reviewed.

Answer 1

True

Financial leverage multiplier, also known as the equity multiplier, is the ratio of a firm's total assets to the total shareholders' equity. The financial leverage multiplier is a variant of the debt ratio and indicates the way a company finances its debts. A high financial leverage or equity multiplier indicates that a firm uses its assets as collateral to raise debt finance for itself. A high financial leverage multiplier can also mean that a large portion of the firm's assets are financed by debt. The financial leverage multiplier indicates to a creditor the risk level of a company. If a company relies too much on debt to finance its assets then this does not indicate much future growth possibility for a company as it will find it difficult to finance its further expansion. A high financial leverage multiplier also indicates that the shareholders hold lesser assets of the firm as compared to its creditors. For the purpose of assessing financial health of a firm, a lower financial leverage multiplier is desirable as it indicates that a firm does not rely much on debt financing. An often used example for utility of financial leverage multiplier in financial analysis is the comparison between Verizon Inc and Apple Inc. Verizon has less shareholders' equity and a higher financial leverage multiplier than Apple which indicates that Verizon relies heavily on debts to finance its business activities while Apple having lower financial leverage multiplier shows that the company does not rely much on debt to fund its business activities. At the same time, Verizon has more stable cash flows compared to that of Apple. This shows that stable cash flows are not the only factor in determining the financial health of a company and that the financial leverage multiplier gives a more complete picture about a company's financial health.