You Are Considering a Stock Investment in One of Two

question 100

Multiple Choice

You are considering a stock investment in one of two firms (A and B) , both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the equity multiplier for the two firms.

• A) Firm A: 15 times; Firm B: 1.00 times
• B) Firm A: 10 times; Firm B: 1.11 times
• C) Firm A: 10 times; Firm B: 9.99 times
• D) Firm A: 20 times; Firm B: 1.11 times

---

Definitions:

Elastic

Elasticity in economics refers to the responsiveness of demand or supply to changes in price or income.

Completely Inelastic

Describes a situation where the demand or supply for a good or service does not change in response to changes in price.

Inelastic

Describes a situation where the demand or supply for a good or service is relatively unresponsive to changes in price.

Elastic

Describes a situation in economics where the supply or demand for a good or service significantly changes in response to changes in price.