How is the Equity Multiplier calculated?

• A. Total Equity / Total Assets.
• B. Total Assets / Total Equity.
• C. Net Income / Total Equity.
• D. Total Liabilities / Total Equity.

Answer: (B)

The equity multiplier measures financial leverage by showing how much of a company's assets are financed with shareholders' equity. It is calculated by dividing total assets by total equity. This ratio is a key part of the DuPont ROE breakdown, where ROE = profit margin × asset turnover × equity multiplier. A higher equity multiplier indicates more assets are funded by debt, which increases leverage (and potentially ROE) but also raises financial risk if earnings decline.

As a quick relation, equity multiplier equals 1 plus the debt-to-equity ratio: EM = 1 + (total liabilities / total equity). For example, if assets are 500 and equity is 100, the equity multiplier is 5 (liabilities would be 400, so D/E = 4 and EM = 5).

The other ideas mix up different concepts: the reciprocal of the correct ratio would be equity/assets, which isn’t the multiplier; net income divided by total equity measures profitability relative to equity; and liabilities divided by equity is the debt-to-equity ratio, a related leverage measure but not the equity multiplier itself.