If firm A has a higher debt-to-equity ratio than firm B, then:
A) firm A has a lower equity multiplier than firm B.
B) firm B has a lower equity multiplier than firm A.
C) firm B has higher financial leverage than firm A.
D) None of the above.

Question

Quizplus · Accepted Answer

The equity multiplier is calculated as total assets divided by total equity. If firm A has a higher debt-to-equity ratio, then it has more debt in relation to equity, which means its total assets are also higher than firm B due to the additional debt. Therefore, firm A will have a higher equity multiplier than firm B, making choices A and C incorrect. Therefore, the correct choice is B.

If Firm a Has a Higher Debt-To-Equity Ratio Than Firm