The current balance sheet of Greyson Inc. reports total assets of $40 million, total liabilities of $4 million, and stockholders' equity of $36 million. Greyson is considering several financing possibilities in order to expand operations. What will be the effect on Greyson's debt to assets ratio if Greyson issues an additional $8 million in stock to finance its expansion?
A) The debt to assets ratio will decrease from .1(4/40) to .083 (4/48) after the additional stock sale.
B) The debt to assets ratio will decrease from 4/36 before to 4/44 after the additional stock sale.
C) The debt to assets ratio will increase from 40 before to 48 after the additional investment.
D) The additional stock issuance will have no effect on the debt to assets ratio.

Question

Quizplus · Accepted Answer

The debt to assets ratio is calculated as total liabilities divided by total assets. Before the additional stock issuance, Greyson's debt to assets ratio is 4/40 = 0.1 or 10%. If the company issues an additional $8 million in stock, their total assets will increase to $48 million. However, their total liabilities will remain the same at $4 million. Therefore, the debt to assets ratio will decrease to 4/48 = 0.083 or 8.3%. Therefore, the correct answer is A.

The Current Balance Sheet of Greyson Inc