Question

Check all that apply. Decrease the company’s use of debt capital because it will decrease the equity multiplier. Reduce the company’s operating expenses, its cost of goods sold, and/or the interest rate on its borrowed funds because this will increase the company’s net profit margin. Decrease the amount of debt financing used by the company, which will decrease the total asset turnover ratio. Use more debt financing in its capital structure and increase the equity multiplier.

Answer 1

Answer: Decrease the company's use of debt capital because it will decrease the equity multiplier (TRUE)

Reduce the company's operating expenses, its cost of goods sold, and/or the interest rate on its borrowed funds because this will increase the company's net profit margin (TRUE)

Decrease the amount of debt financing used by the company which will decrease the total asset turnover ratio (FALSE)

Use more debt financing in its capital structure and increase the equity multiplier (TRUE)

Explanation:

EQUITY MULTIPLIER is given as (Total Asset)/(Total shareholders equity). It measures how much of a company's asset is financed by shareholders. A company finances its assets through the combination of shareholder equity and DEBT (liability). Thus, the greater the percentage of debt used in financing asset, the lower the proportion of equity used. In order words, if debt decreases, asset decreases and therefore equity multiplier decreases.

NET PROFIT MARGIN is given as (Net Profit)/(Sales Revenue). Net profit increases when operating expenses, cost of goods sold, and interest rate deceases. This will lead to an increase in net profit margin.

TOTAL ASSET TURNOVER RATIO is given as (Net sales)/(Total Asset). It measure the effectiveness of an organisation to produce and make sales using its assets. If debt financing is decreased, it lead to a decrease in total asset and then increase (not decrease) in asset turnover ratio (assume net sales does not change)

We had defined equity multiplier above. If we use more debt financing, the proportion of equity in asset reduces, leading to an increase in equity multiplier.