You are comparing the financial performance of two companies with similar Net Income and Asset Value. Company A has a debt/equity ratio of .50/1 while Company B has a debt/equity ratio of 2/1. Based on this, what general observation may be made regarding the two companies.
A. Company A has a higher level of debt relative to its total capital structure than Company B
B. Company B is likely better positioned to weather downturns in its business than Company A
C. Company A will have a higher return on Equity than Company B.
D. Company B will have a higher return on Equity than Company A
E. Company A will have a higher equity multiplier than Company B.
Answer: . Company A will have a higher equity multiplier than Company B.
Explanation
We have been given that,
Company A has a debt/equity ratio of .50/1 while
Company B has a debt/equity ratio of 2/1.
Equity multiplier is financial leverage ratio which measures amount of a firm’s assets which are financed by it shareholders
So we can say that, Company A will have a higher equity multiplier than Company B.
