A firm currently has $600 in debt for every $1,000 in equity.Assume the firm 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 as total assets divided by equity. If the firm decreases its debt while maintaining its equity, the total assets will decrease, causing the equity multiplier to decrease.

A Firm Currently Has $600 in Debt for Every $1,000