New Enroll in our GIC Finance Online Course Here!

    Register

    Question

    Which of the following is the utility of Equity

    Multiplier for the investor?
    A To know the portion of interest on debt that can be covered from earnings available to equity shareholders Correct Answer Incorrect Answer
    B To know the number of times preference share interest can be paid from earnings available to equity shareholders Correct Answer Incorrect Answer
    C To know the portion of return on equity generated as a result of debt Correct Answer Incorrect Answer
    D To know the number of times equity is multiplied to get the value of debt Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    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.

    Practice Next

    Relevant for Exams: