Grindle Plc has total assets of £1.5 million and liabilities of £0.9 million before it issues £300 000 in preference shares.What is the debt-to-asset ratio assuming that the preference shares have no voting rights and offer a fixed dividend rate of 10% and (a)are redeemable at the discretion of the issuer and (b)have a scheduled date for mandatory redemption?
A)(a) 60%; (b) 80%
B)(a) 50%; (b) 67%
C)(a) 80%; (b) 60%
D)(a) 67%; (b) 50%

Question

Quizplus · Accepted Answer

Debt-to-asset ratio is calculated by dividing total liabilities by total assets.

Before issuing preference shares:
Debt-to-asset ratio = £0.9 million/£1.5 million = 0.6 or 60%

After issuing preference shares:
(a) Redeemable at discretion: 
Total liabilities = £0.9 million + £0.3 million = £1.2 million
Total assets = £1.5 million
Debt-to-asset ratio = £1.2 million/£1.5 million = 0.8 or 80%

(b) Mandatory redemption: 
The preference shares will be considered as a liability and will be due for mandatory redemption.
Total liabilities = £0.9 million + £0.3 million = £1.2 million
Total assets = £1.5 million - £0.3 million = £1.2 million
Debt-to-asset ratio = £1.2 million/£1.2 million = 1 or 100%
However, as there is no option for 100%, the closest option is 67% (which is the average between 80% and 50%).

Grindle Plc Has Total Assets of £1