Which of the following statements is most correct?
A) A firm with financial leverage has a larger equity multiplier than an otherwise identical firm with no debt in its capital structure.
B) The use of debt in a company's capital structure results in tax benefits to the investors who purchase the company's bonds.
C) All else equal, a firm with a higher debt ratio will have a lower basic earning power ratio.
D) All of the answers above are correct.
E) Answers a and c are correct.

Question

Quizplus · Accepted Answer

A firm with financial leverage (i.e., using debt) will have a larger equity multiplier because the equity multiplier is calculated as total assets divided by total equity, and using debt increases total assets without increasing equity.

Which of the Following Statements Is Most Correct