Question

Mahoe Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1
Assets	Year 2			Year 1
Current assets:
Cash	$	105,000		$	190,000
Accounts receivable, net		255,000			220,000
Inventory		206,000			200,000
Prepaid expenses		44,000			50,000
Total current assets		610,000			660,000
Plant and equipment, net		1,065,000			970,000
Total assets	$	1,675,000		$	1,630,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	119,000		$	110,000
Accrued liabilities		88,000			80,000
Notes payable, short term		53,000			50,000
Total current liabilities		260,000			240,000
Bonds payable		110,000			110,000
Total liabilities		370,000			350,000
Stockholders’ equity:
Common stock, $5 par value		250,000			250,000
Additional paid-in capital		70,000			70,000
Retained earnings		985,000			960,000
Total stockholders’ equity		1,305,000			1,280,000
Total liabilities & stockholders’ equity	$	1,675,000		$	1,630,000

Income Statement
For the Year Ended December 31, Year 2
Sales (all on account)	$	1,330,000
Cost of goods sold		890,000
Gross margin		440,000
Operating expenses		393,571
Net operating income		46,429
Interest expense		10,000
Net income before taxes		36,429
Income taxes (30%)		10,929
Net income	$	25,500

Dividends on common stock during Year 2 totaled $500. The market price of common stock at the end of Year 2 was $8.06 per share.

The company’s equity multiplier at the end of Year 2 is closest to:

Multiple Choice

• 0.28

• 1.28

• 3.53

• 0.78

Answer 1

Equity multiplier = Total assets/Total equity = 1,675,000/1,305,000 = 1.28 Option B is the answer