An equity multiplier of 1.64 means that for every $1 the ﬁrm raises in new equity, the ﬁrm can:
A) Acquire an additional $1.64 in new assets.
B) Acquire an additional $1.64 in new debt.
C) Earn $1.64 in additional proﬁts.
D) Earn $1.64 in additional proﬁts per share.
E) Pay $1.64 in additional dividends per share.

Question

Quizplus · Accepted Answer

An equity multiplier measures the extent to which a firm uses debt to finance its assets. The formula for equity multiplier is total assets divided by equity. Therefore, if the equity multiplier is 1.64, it means that for every $1 of equity, the firm has $1.64 in assets. This implies that for every $1 of new equity raised, the firm can acquire an additional $1.64 in new assets.

An Equity Multiplier of 1