DL Farms currently has $600 in debt for every $1,000 in equity. Assume the company uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action?
A) Equity multiplier
B) Total asset turnover
C) Profit margin
D) Return on assets
E) Return on equity

Question

Quizplus · Accepted Answer

The equity multiplier is calculated by dividing total assets by equity. If the company uses cash to decrease its debt while maintaining its current equity, then the total assets would decrease but the equity would remain the same. This would result in a decrease in the equity multiplier.

DL Farms Currently Has $600 in Debt for Every $1,000