You are considering a stock investment in one of two firms (A and B), both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the equity multiplier for the two firms.
A) Firm A: 15 times; Firm B: 1.00 times
B) Firm A: 10 times; Firm B: 1.11 times
C) Firm A: 10 times; Firm B: 9.99 times
D) Firm A: 20 times; Firm B: 1.11 times

Question

Quizplus · Accepted Answer

The equity multiplier is calculated as Total Assets / Total Equity. For Firm A, it is $20 million / $2 million = 10 times. For Firm B, it is $20 million / $18 million = 1.11 times.

You Are Considering a Stock Investment in One of Two