Quixote Industries currently has $6 million in debt and $10 million in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease as a result of this action? equity multiplier total asset turnover profit margin return on assets return on equity Solution Equity Multiplier will decrease Let us illustrate with some example Equity Multiplier=Total Assets/Total Stock holder’s Equity Total Assets=$12000 Stock holder’s Equity=$2,000 Hence Equity Multiplier =12,000/2,000=6 If we pay debt by cash Lets say =$2,000 Total Asset will become=$10,000 Hence Equity Multiplier =10,000/2,000=5 .

1. Quixote Industries currently has $6 million in debt and $10 million in equity. Assume the firm
uses some of its cash to decrease its debt while maintaining its current equity and net income.
Which one of the following will decrease as a result of this action?
equity multiplier
total asset turnover
profit margin
return on assets
return on equity
equity multiplier
total asset turnover
profit margin
return on assets
return on equity
Solution
Equity Multiplier will decrease
Let us illustrate with some example
Equity Multiplier=Total Assets/Total Stock holder’s Equity
Total Assets=$12000
Stock holder’s Equity=$2,000
Hence Equity Multiplier =12,000/2,000=6
If we pay debt by cash Lets say =$2,000 Total Asset will become=$10,000

2. Hence Equity Multiplier =10,000/2,000=5