Emerald Company issued additional shares of stock. Which of the following is true with regard to the effect of the stock issuance transaction on Emerald's ratio computations?
A) Earnings per share decreases
B) The debt to equity ratio increases
C) The asset turnover ratio increases
D) Return on equity remained unchanged

Question

Quizplus · Accepted Answer

When a company issues additional shares of stock, the total number of outstanding shares increases, which dilutes the earnings per share. This is because the same amount of earnings is now spread out among a larger number of shares, causing the earnings per share to decrease. The debt to equity ratio and asset turnover ratio are not directly affected by the stock issuance, and the return on equity can only be determined by considering additional information about the company's profitability.

Emerald Company Issued Additional Shares of Stock