firm with a debt ratio of 0.75, will have an equity multiplier of ____.

Question

Quizplus · Accepted Answer

Equity Multiplier = Total Assets / Total Equity
Debt Ratio = Total Debt / Total Assets

As we know, Debt Ratio = 0.75

Therefore, Total Debt/Total Assets = 0.75
Total Equity/Total Assets = 1 - 0.75 = 0.25

So, Equity Multiplier = Total Assets / Total Equity
= (Total Debt + Total Equity) / Total Equity
= 1 + Total Debt/Total Equity
= 1 + 0.75/0.25
= 4

Hence, the answer is D.

Firm with a Debt Ratio of 0