If Alex Corporation takes out a bank loan to purchase a machine used in production and everything else stays the same, its equity multiplier will ________, and its ROE will
If Alex Corporation takes out a bank loan to purchase a machine used in production and everything else stays the same, its equity multiplier will ________, and its ROE will
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
If Alex Corporation takes out a bank loan to purchase a machine used in production and
everything else stays the same, its equity multiplier will ________, and its ROE will
________.
- A) increase; increase
- B) decrease; decrease
- C) increase; decrease
- D) decrease; increase
Expert Solution
Step 1
Equity Multiplier:
It represents the portion of the firm's assets financed by the shareholder's equity. Hence, it is computed by dividing total assets by total shareholders equity.
A low equity multiplier implies the firm has low leverage and high equity multiplier implies the firm has high leverage.
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