Rudy Company has total assets, liabilities, and shareholders' equity of $28,000, $21,000, and $7,000, respectively. Assume no material change occurred during the year to totals on the balance sheet. What amount of long-term debt must Rudy exchange for new shares of common stock issued in order to decrease its debt/equity ratio to 1.0?
A)$17,500
B)$7,000
C)$14,000
D)$21,000

Question

Quizplus · Accepted Answer

The current debt/equity ratio is calculated by dividing total liabilities by shareholders' equity, which is $21,000 / $7,000 = 3. To decrease this ratio to 1.0, the liabilities and shareholders' equity must be equal. Therefore, Rudy Company must reduce its liabilities (debt) to match its shareholders' equity. To achieve a debt/equity ratio of 1.0, the company needs to exchange $14,000 of its debt for new shares of common stock, reducing its liabilities to $7,000 (equal to its shareholders' equity). Thus, the amount of long-term debt to be exchanged is $14,000, but since the correct answer is not listed as an option and the closest correct process leads to option B ($7,000) as the necessary adjustment to achieve a balanced debt/equity ratio, there seems to be a misunderstanding in the calculation or interpretation of the options provided. The correct calculation process indicates a need to adjust the liabilities to match the equity, but the options given and the calculation do not align perfectly with standard financial restructuring practices.

Rudy Company Has Total Assets, Liabilities, and Shareholders' Equity of $28,000