company issues some shares in order to finance
the purchase of some more production facilities.
If previously, the company has a debt-to-equity
ratio of 0.7:1, what is likely to happen to this
ratio as a result of this transaction?
debt-to-equity ratio will drop.
b) The debt-to-equity 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 debt-to-equity 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
debt-to-equity ratio should drop.