What will be the effect on Gamma's debt ratio if Gamma's owner invests an additional $5 million to finance its expansion?
A) The debt ratio will decrease from .1 (3/30) to .0857 (3/35) after the additional investment.
B) The debt ratio will decrease from 3/27 before to 3/32 after the additional investment.
C) The debt ratio will increase from 30 before to 35 after the additional investment.
D) Additional investment by owner will have no effect on the debt ratio.

Question

Quizplus · Accepted Answer

The debt ratio is calculated as total debt divided by total assets. 
Before the investment, the debt ratio for Gamma was 3/30 = 0.1. 
After the investment of $5 million, total assets will increase to $35 million. If there is no increase in total debt, the new debt ratio will be 3/35 = 0.0857. Therefore, option A is the correct answer.

What Will Be the Effect on Gamma's Debt Ratio If