Garwryk, Inc., which is financed with debt and equity, presently has a debt ratio of 80 percent.

Question:

Garwryk, Inc., which is financed with debt and equity, presently has a debt ratio of 80 percent. What is the firm’s equity multiplier? How is the equity multiplier related to the firm’s use of debt financing (i.e., if the firm increased its use of debt financing, would this increase or decrease its equity multiplier)? Explain.