If Company As equity multiplier is 3.65, which of the following would not be true?
A) 3.65 is the financial leverage ratio using the DuPont System.
B) Company As total assets are 3.65 times its shareholders equity.
C) Company A has leveraged every dollar of shareholders' equity into $3.65 of total financing.
D) 3.65 can be multiplied by return on equity for Company A to find Company As return on assets.

Question

Quizplus · Accepted Answer

The equity multiplier is indeed a measure of financial leverage and indicates how much of a company's assets are financed by stockholders' equity. It is calculated as Total Assets / Shareholders' Equity. Therefore, statements A, B, and C are true as they correctly describe aspects of the equity multiplier's implications. However, D is incorrect because the correct formula to find the return on assets (ROA) using the equity multiplier involves dividing the return on equity (ROE) by the equity multiplier, not multiplying them.

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