Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?

Question

Quizplus · Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by total equity. Issuing the bonds will increase total liabilities by $5,000,000, resulting in a higher debt-to-equity ratio. The new debt-to-equity ratio can be calculated as follows: (17,500,000 + 5,000,000) / (35,000,000 - 5,000,000) = 22.5 / 20 = 1.125 or 1.1 (rounded to the nearest tenth). Therefore, the debt-to-equity ratio will worsen from 1.0 to 1.1.

Seedly Corporation's Most Recent Balance Sheet Reports Total Assets of $35,000,000