DuPont analysis) Garwryk, Inc., which is financed with debt and equity, presently has a debt ratio of percent. What is the firm's equity multiplier? How is the equity multiplier related to the firm's use of debt financing (i.e., if the firm increased its use of debt financing would this increase or decrease its equity multiplier)? Explain. What is the firm's equity multiplier? The equity multiplier is given by: equity multiplier = 1/1-DEBT RATIO The equity multiplier is___. (Round to two decimal places.) How is the equity multiplier related to the firm's use of debt financing (i.e., if the firm increased its use of debt financing would this increase or decrease its equity multiplier)? Explain. (Select the best choice below.) A. If the company decreases its debt financing it will increase its debt ratio, therefore it will increase its equity multiplier. B.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
FIN320
(DuPont analysis) Garwryk, Inc., which is financed with debt and equity, presently has a debt ratio of percent. What is the firm's equity multiplier? How is the equity multiplier related to the firm's use of debt financing (i.e., if the firm increased its use of debt financing would this increase or decrease its equity multiplier)? Explain.
What is the firm's equity multiplier?
The equity multiplier is given by: equity multiplier = 1/1-DEBT RATIO
The equity multiplier is___. (Round to two decimal places.)
How is the equity multiplier related to the firm's use of debt financing (i.e., if the firm increased its use of debt financing would this increase or decrease its equity multiplier)? Explain. (Select the best choice below.)
A.
If the company decreases its debt financing it will increase its debt ratio, therefore it will increase its equity multiplier.
B.
If the company increases its debt financing it will increase its debt ratio, therefore it will decrease its equity multiplier.
C.
If the company increases its debt financing it will decrease its debt ratio, therefore it will decrease its equity multiplier.
D.
If the company increases its debt financing it will increase its debt ratio, therefore it will increase its equity multiplier.
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