The current balance sheet of Greyson Inc. reports total assets of $40 million, total liabilities of $4 million, and stockholders' equity of $36 million. Greyson is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. What will be the effect on Greyson's debt to assets ratio if Greyson issues an additional $8 million in stock to finance its expansion?
A)The debt to assets ratio will decrease from .1(4/40) to .083 (4/48) after the additional stock sale.
B)The debt to assets ratio will decrease from 4/36 before to 4/44 after the additional stock sale.
C)The debt to assets ratio will increase from 40 before to 48 after the additional investment.
D)The additional stock issuance will have no effect on the debt to assets ratio.

Question

Quizplus · Accepted Answer

Debt to assets ratio = Total liabilities/Total assets
Before the additional stock sale: Debt to assets ratio = 4/40 = 0.1
After the additional stock sale: Total assets will increase to $48 million ($40 million + $8 million), while total liabilities will remain at $4 million. 
Debt to assets ratio after the sale = 4/48 = 0.083. Therefore, the debt to assets ratio will decrease from 0.1 to 0.083 after the additional stock sale.

The Current Balance Sheet of Greyson Inc