Final answer:
An increasing equity multiplier means a company is using more debt than equity to fund its assets. An increasing equity multiplier signifies that a company is leveraging more debt in its financing structure, quite contrary to reducing its financial leverage or relying more on equity funding. The correct answer is C.
Step-by-step explanation:
An increasing equity multiplier means a company is using more debt than equity to fund its assets.
The equity multiplier is a financial ratio that measures the proportion of a company's assets that are financed by debt versus equity. It is calculated by dividing total assets by shareholders' equity. When the equity multiplier increases, it indicates that the company is relying more on debt to finance its assets.
For example, if a company has total assets of $1 million and shareholders' equity of $500,000, its equity multiplier would be 2 ($1,000,000 / $500,000). If the equity multiplier increases to 3, it means the company's debt financing has increased relative to its equity financing.
An increasing equity multiplier signifies that a company is leveraging more debt in its financing structure, quite contrary to reducing its financial leverage or relying more on equity funding.
An increasing equity multiplier indicates that a company is using more debt than equity to fund its assets. In the context of corporate finance, the equity multiplier is a measure of financial leverage. Companies use it to determine the proportion of total assets funded by equity. A higher equity multiplier means that debt is more heavily utilized in financing the company's assets.
Leverage is often looked at critically during economic downturns because, as seen during periods such as the dot-com bubble or a housing crash, high borrowing can exacerbate economic instability. The money multiplier relates to this because it reflects how loans can circulate and amplify financial activity within an economy. When banks lend more, economic growth can be stimulated. However, if leverage reaches unsustainable levels and the economic climate sours, the consequences can be severe as credit contracts and asset prices fall.