If a firm produces a twelve percent return on assets and also a twelve percent return on equity,then the firm:
A)may have short-term, but not long-term debt.
B)is using its assets as efficiently as possible.
C)has no net working capital.
D)has a debt-equity ratio of 1.0.
E)has an equity multiplier of 1.0.

Question

Quizplus · Accepted Answer

If the return on assets equals the return on equity, it implies that there is no financial leverage, meaning the firm has no debt. Therefore, the equity multiplier, which measures financial leverage, is 1.0.

If a Firm Produces a Twelve Percent Return on Assets