Question
With the information given below, what is the Equity
Multiplier of a firm? Total Assets of the firm = 200,000 Total Debt =50,000 Total Equity =40,000Solution
The equity multiplier is calculated by dividing a company's total asset value by total net equity, and it measures financial leverage. Companies finance their operations with equity or debt, so a high equity multiplier indicates that a larger portion of asset financing is attributed to debt. Equity multiplier = Total Assets/Total equity = 200,000/40,000= 5
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