Grindle Ltd 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 per cent and (a)are redeemable at the discretion of the issuer and (b)have a scheduled date for mandatory redemption?
A) (a) 60 per cent (b) 80 per cent
B) (a) 50 per cent (b) 67 per cent
C) (a) 80 per cent (b) 60 per cent
D) (a) 67 per cent (b) 50 per cent
E) None of the given answers.

Question

Quizplus · Accepted Answer

Debt to asset ratio = (Total liabilities + Preference shares) / Total assets
(a) For redeemable preference shares, since the issuer has the discretion to redeem them at any time, they can be considered as debt. Therefore, the debt to asset ratio would be:
($0.9 million + $300,000) / $1.5 million = 60%
(b) For preference shares with a mandatory redemption date, they are considered as equity until the redemption date. Therefore, the debt to asset ratio would be:
($0.9 million) / $1.5 million = 60%
The best choice is (B) as it correctly calculates the debt to asset ratio for both scenarios.

Grindle Ltd Has Total Assets of $1