If other things remain the same the lower the debt ratio the

If other things remain the same, the lower the debt ratio, the lower the equity multiplier. O True O False

Solution

TRUE

Equity multiplier= 1-1/Debt Equity ratio

Suppose D/E is 2, EM= 1-1/2 = 0.5

If D/E is 3, EM = 1-1/3 = 0.67

Hence the statement is true

Also lower D/E means higher equity. Since Equity Multiplier= Total assets/ Equity, higher equity reduces the EM.