Question

Which of the following is most correct:Question 8 options:A firm with financial leverage has a larger equity multiplier than an otherwise identical firm with no debt in its capital structure.The use of debt in a companys capital structure results in tax benefits to the investors who purchase the companys bonds.All else equal, a firm with a higher debt ratio will have a lower basic earning power ratio.All of the statements above are correct.Statements a and c are correct.

Answer 1

Answer:

A firm with financial leverage has a larger equity multiplier than an otherwise identical firm with no debt in its capital structure.

Explanation:

The equity multiplier basically tells us what portion of the company's assets were financed through equity, i.e. what portion was financed by the company's owners.

the formula to determine the equity multiplier = total assets / total equity

the higher the equity multiplier, the higher the return on equity (ROE), but a high equity multiplier (financial leverage) also increases the company's risk since eventually it might not be able to pay off its creditors if something goes wrong.