Question

What is the relationship between Capital and the Equity Multiplier?

Answer 1

The relationship between the Capital and the Equity Multiplier is that

1) The equity multiplier is the ratio of total assets divided by the total shareholder's equity (ie. equity capital plus retained earnings).

2) The Capital is the prime fund invested in the company and it forms a crucial part of the Total Shareholder's equity.

Thus, as capital is the part and partial of the Shareholders' Equity so it being higher would provide us lower Equity Multiplier which means that Assets contains more of capital investment than debt and the company's capital structure is poorly leveraged by debt so that the shareholder's wealth could be appreciated.

So, Capital being less subscribed in the Capital structure of the company then the equity multiplier is higher which shows that more of the assets is financed by the debts and company is being operated with the application of less capital and adequate leveraging of the capital structure is done so that the shareholders be well benefited and appreciate their wealth.