Multiple Choice
Which of the following statements best explains the accounting cycle?
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1. Introduction to Accounting
Fundamental Accounting Equation
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Coulter Supply has a total debt ratio of 0.46. What is the equity multiplier?
A
1.85
B
0.54
C
2.17
D
0.46
Verified step by step guidance1
Understand the relationship between the total debt ratio, equity multiplier, and total assets. The total debt ratio is defined as the proportion of total assets financed by debt, while the equity multiplier is a measure of financial leverage calculated as Total Assets divided by Total Equity.
Recall the formula for the equity multiplier: \( \text{Equity Multiplier} = \frac{1}{1 - \text{Total Debt Ratio}} \). This formula is derived from the fact that Total Equity is \( 1 - \text{Total Debt Ratio} \) when expressed as a proportion of total assets.
Substitute the given total debt ratio (0.46) into the formula: \( \text{Equity Multiplier} = \frac{1}{1 - 0.46} \).
Simplify the denominator: \( 1 - 0.46 = 0.54 \). The equity multiplier formula now becomes \( \text{Equity Multiplier} = \frac{1}{0.54} \).
Perform the division to calculate the equity multiplier. The result will be one of the provided options: 1.85, 0.54, 2.17, or 0.46.
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