Q:
A:
A
company issues some shares in order to finance
the purchase of some more production facilities.
If previously, the company has a debttoequity
ratio of 0.7:1, what is likely to happen to this
ratio as a result of this transaction?
a) The debttoequity ratio will drop.
b) The debttoequity ratio will rise.
c) Since debt was not involved, it cannot be determined with the information given, how this ratio will be affected.
d) The debttoequity ratio will not be affected.
a) The debttoequity ratio will drop.
b) The debttoequity ratio will rise.
c) Since debt was not involved, it cannot be determined with the information given, how this ratio will be affected.
d) The debttoequity ratio will not be affected.
The correct answer is: a)
This transaction will increase the assets of the company and its equity by the same amount. Hence, with a constant debt and an increasing equity, the debttoequity ratio should drop.
This transaction will increase the assets of the company and its equity by the same amount. Hence, with a constant debt and an increasing equity, the debttoequity ratio should drop.
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