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

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Definitions:

Knowledgeable Investors

Individuals or entities that possess an understanding and experience in financial and business matters, making them capable of evaluating investment risks and merits.

General Solicitation

The act of publicly advertising an investment opportunity to potential investors.

Business Combination

The merger or joining of two or more companies into one entity, often to expand market share or diversify offerings.

SEC

The U.S. Securities and Exchange Commission, a federal agency responsible for enforcing federal securities laws and regulating the securities industry.