What is the equity multiple?

What is the equity multiple?

• A. How many times an investment pays back its equity
• B. The total return on investment in dollars
• C. The internal rate of return adjusted for time
• D. The cash-on-cash yield

Answer: (A)

Equity multiple captures how many times the investor’s equity is returned over the life of the project. It’s computed as total cash distributions to equity divided by the total equity contributed. This tells you the multiple of your initial investment that you receive back, without regard to when those cash flows occur. It’s expressed as a multiple (for example, 2.0x means you got back twice your invested equity). Because it ignores timing, two deals can have the same equity multiple but different risk or desirability if their cash-flow timing differs; IRR would reflect that timing difference. The option describing this idea—how many times the investment pays back its equity—is the best match.

Equity multiple captures how many times the investor’s equity is returned over the life of the project. It’s computed as total cash distributions to equity divided by the total equity contributed. This tells you the multiple of your initial investment that you receive back, without regard to when those cash flows occur. It’s expressed as a multiple (for example, 2.0x means you got back twice your invested equity). Because it ignores timing, two deals can have the same equity multiple but different risk or desirability if their cash-flow timing differs; IRR would reflect that timing difference. The option describing this idea—how many times the investment pays back its equity—is the best match.