Compute the equity multiplier given Total Assets of 1,000,000 and Total Equity of 500,000.

Compute the equity multiplier given Total Assets of 1,000,000 and Total Equity of 500,000.

• A. 1.5
• B. 2.0
• C. 1.0
• D. 2.5

Answer: (B)

Equity multiplier measures financial leverage by showing how many dollars of assets are financed per dollar of shareholders’ equity. It’s calculated as Total Assets divided by Total Equity. With assets of 1,000,000 and equity of 500,000, the calculation is 1,000,000 / 500,000 = 2. This means two dollars of assets are funded for every one dollar of equity, with the remaining portion financed by liabilities. A higher multiplier indicates more leverage, and in this case the ratio being 2.0 reflects that level of leverage.

Equity multiplier measures financial leverage by showing how many dollars of assets are financed per dollar of shareholders’ equity. It’s calculated as Total Assets divided by Total Equity. With assets of 1,000,000 and equity of 500,000, the calculation is 1,000,000 / 500,000 = 2. This means two dollars of assets are funded for every one dollar of equity, with the remaining portion financed by liabilities. A higher multiplier indicates more leverage, and in this case the ratio being 2.0 reflects that level of leverage.