Question

Fresh Foods has sales of $213,600, total assets of $198,700, a debt-equity ratio of 1.43, and a profit margin of 4.8 percent. What is the equity multiplier?

a. .30
b. .43
c. 1.93
d. 2.43
e. 2.30

Answer 1

The equity multiplier for Fresh Foods is calculated using the given debt-equity ratio, with a resulting equity multiplier of 2.43.

Step-by-step explanation:

The student asks for the calculation of the equity multiplier, which is a financial leverage ratio indicating the proportion of a company's assets that are financed by stockholders' equity. Using the debt-equity ratio given, the equity multiplier can be calculated because these two ratios are related. The formula for the debt-equity ratio is Total Debt / Total Equity, and the formula for the equity multiplier is Total Assets / Total Equity. Since we know the debt-equity ratio is 1.43, we can express Total Equity as Total Debt / 1.43. Then, using the formula for the equity multiplier, we replace Total Equity in the denominator with Total Debt / 1.43. The equity multiplier formula now becomes Total Assets / (Total Debt / 1.43). Because Total Debt is also Total Assets minus Total Equity (using the accounting equation: Assets = Debt + Equity), we can infer that 1.43 = (Total Assets - Total Equity) / Total Equity. After arranging the equation, it becomes Total Equity = Total Assets / (1 + 1.43). The equity multiplier is thus Total Assets divided by this new expression for Total Equity, which simplifies to 1 + 1.43, or 2.43. Hence, the equity multiplier for Fresh Foods is 2.43 (choice d).