Final answer:
The firm's equity multiplier (EM), given a debt ratio of 0.30, is calculated by dividing total assets by total equity. Since equity is 70% of assets in this case, the EM is the reciprocal of 0.70, leading to an EM of 1.4286, which rounds to 1.43.
Step-by-step explanation:
If we have a debt ratio of 0.30, then this means that the debt is 30% of the total assets. Equity is the remaining percentage of assets that is not financed by debt, which in this case would be 70% (100% - 30%). The equity multiplier (EM) is calculated as the total assets divided by the total equity. So, if debt is 30% of assets, that implies equity is 70% of assets, making the equity multiplier the reciprocal of equity as a portion of assets:
Equity Multiplier = 1 / Equity portion of assets
Therefore:
Equity Multiplier = 1 / 0.70
To get the final value for the Equity Multiplier (EM), we perform the actual division:
Equity Multiplier = 1 / 0.70 = 1.4286
After rounding to two decimal places, the equity multiplier would be 1.43.