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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