Which of the following statements is correct?
A) The lower the level of a firm's debt, the higher the firm's leverage.
B) The lower the level of a firm's debt, the lower the firm's equity multiplier.
C) The lower the level of a firm's debt, the higher the firm's equity multiplier.
D) The tax benefit from using debt financing reduces a firm's risk.

Question

Quizplus · Accepted Answer

The equity multiplier is a measure of financial leverage. A lower level of debt means a firm is using less leverage, which translates to a lower equity multiplier. This is because the equity multiplier is calculated as total assets divided by total equity; less debt means a smaller proportion of assets is financed by debt, leading to a lower equity multiplier.

Which of the Following Statements Is Correct