Question
In: Finance
If a company has a debt to equity ratio of 1.3, then the equity multiplier is...
If a company has a debt to equity ratio of 1.3, then the equity multiplier is approximately:
1. 2.3
2. 1.3
3. 2.6
Solutions
Expert Solution
The company has a debt to equity ratio of 1.3. This means,
Debt/Equity = 1.3
Debt = 1.3Equity
Total Assets = Debt + Equity
= 1.3 Equity +
Equity
= 2.3 Equity
Equity multiplier measures the firm’s asset that are financed by
Equity. The formula to calculate Equity multiplier is :
Equity Multiplier = Total Assets/ Total Stock holder’s Equity
Using the value of Total Assets derived above,
Equity Multiplier = 2.3Equity/Equity
= 2.3
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