A company has a debt-to-assets ratio of 0.45 and a return on equity ratio of 10%.If the company then issues additional shares of common stock for cash,which of the following is a correct statement?
A)The debt-to-assets ratio will decrease and the return on equity ratio will decrease.
B)The debt-to-assets ratio will increase and the return on equity ratio will increase.
C)The debt-to-assets ratio will not change and the return on equity ratio will not change.
D)The debt-to-assets ratio will decrease and the return on equity ratio will increase.

Question

Quizplus · Accepted Answer

Debt-to-assets ratio = Total liabilities ÷ Total assets
Return on equity (ROE)= [(Net income − Preferred dividends)÷ Average common stockholders' equity] × 100
If the company issues additional shares of common stock for cash,both assets and stockholders' equity will increase as a result of this transaction.The debt-to-assets ratio will decrease since assets increase.The return on equity ratio will decrease since average common stockholders' equity increases.

A Company Has a Debt-To-Assets Ratio of 0