Question
Which of the following is the utility of Equity
Multiplier for the investor?Solution
The equity multiplier is a financial ratio that allows investors to understand the extent to which a company's return on equity (ROE) is influenced by debt. It measures the proportion of a company's assets that are funded by debt relative to equity. The formula for the equity multiplier is: Equity Multiplier = Total Assets / Total Equity By calculating the equity multiplier, investors can determine how much of the return on equity is attributable to debt financing. A higher equity multiplier indicates a larger portion of the company's ROE is a result of debt, while a lower equity multiplier suggests that equity financing plays a more significant role in generating the company's return.
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