Question

This year, Sampson Company reported total assets of $2,350,000, total liabilities of $700,000, and total stockholders’ equity of $1,650,000. Last year, it reported total assets of $1,650,000, total liabilities of $650,000, and total stockholders’ equity of $1,000,000. For the two years, average total assets were $2,000,000 and average total stockholders’ equity was $1,325,000. Compute the equity multiplier.

A. 1.51

B. 1.42

C. 0.42

D. 0.51

Match the term and the definition				Terms
1.	Indicates the relative proportions of debt and equity at one point in time on a company's balance sheet			Debt-to-equity ratio
2.	The most common measure of a company's ability to provide protection to its long-term creditors			Equity multiplier
3.	It indicates that a company is increasing its financial leverage			Times interest earned ratio

Answer 1

Equity multiplier = Average total assets/Average total stockholders’ equity

Equity multiplier = 2000000/1325000= 1.51

Option A 1.51 is correct

Question-2
1	Indicates the relative proportions of debt and equity at one point in time on a company's balance sheet	Debt-to-equity ratio
2	The most common measure of a company's ability to provide protection to its long-term creditors	Times interest earned ratio
3	It indicates that a company is increasing its financial leverage	Equity multiplier