Which of the following actions would necessarily result in a higher debt-equity ratio, all else equal?
A)Convertible bondholders convert their bonds to shares of common stock.
B)The value of the firm's equity increases because of a lower cost of equity capital.
C)Warrant owners exercise their warrants.
D)The firm uses its excess cash to repurchase some of its shares.

Question

Quizplus · Accepted Answer

The firm using excess cash to repurchase shares would reduce the total amount of equity in the firm, while the amount of debt would stay the same, resulting in a higher debt-equity ratio. Repurchasing shares reduces the amount of equity on the balance sheet, which increases the debt-equity ratio. Therefore, using excess cash to repurchase shares would necessarily result in a higher debt-equity ratio.

Which of the Following Actions Would Necessarily Result in a Higher