In words, what does an equity multiplier of 2 mean?
A) Each dollar in assets the ﬁrm owns is supported by $2 in equity.
B) Each dollar in equity the ﬁrm has supports $2 in assets.
C) Each dollar in assets the ﬁrm owns is supported by $4 in equity.
D) Each dollar in equity the ﬁrm has supports ﬁfty cents in assets.
E) Each dollar in assets the ﬁrm owns is supported by $2 in debt.

Question

Quizplus · Accepted Answer

An equity multiplier of 2 means that for every dollar in equity the firm has, they have $2 in assets. This can be calculated by dividing total assets by total equity. Therefore, choice B is the correct answer.

In Words, What Does an Equity Multiplier of 2 Mean