Final answer:
An equity multiplier of 2.47 implies a debt-to-equity ratio of 1.47, meaning the company has £1.47 of debt for every £1 of equity.
Step-by-step explanation:
The equity multiplier is a measure of a company's financial leverage, calculated by dividing total assets by shareholders' equity. Given an equity multiplier of 2.47, the debt-to-equity ratio can be calculated as follows:
Equity Multiplier = Total Assets / Shareholders' Equity
Debt-to-Equity Ratio = (Total Assets - Shareholders' Equity) / Shareholders' Equity
Since the equity multiplier is 2.47, we can set up the equation as:
2.47 = Total Assets / Shareholders' Equity
To find the debt-to-equity ratio, we rearrange the equation to solve for Total Assets:
Total Assets = 2.47 × Shareholders' Equity
Now, to find the debt-to-equity ratio, we subtract Shareholders' Equity from both sides:
(Total Assets - Shareholders' Equity) = 2.47 × Shareholders' Equity - Shareholders' Equity
This simplifies to:
Debt = 1.47 × Shareholders' Equity
Therefore, the debt-to-equity ratio is 1.47 (or 147% if expressed as a percentage), which indicates the company has £1.47 of debt for every £1 of equity.