The current balance sheet of Sanders Inc.reports total assets of $20 million, total liabilities of $2 million, and owners' equity of $18 million.Sanders Inc.is considering several financing possibilities in order to expand operations.
If Sanders Inc.'s owner invests an additional $2 million to finance the expansion, the debt to equity ratio will
A)stay the same
B)decrease
C)increase
D)cannot be determined from this information.

Question

Quizplus · Accepted Answer

If the owner invests an additional $2 million, the assets of Sanders Inc. would increase to $22 million while keeping the liabilities unchanged at $2 million. This would result in an increase in owners' equity to $20 million. Therefore, the debt to equity ratio (total liabilities divided by owners' equity) would decrease from 0.111 (2/18) to 0.1 (2/20).

The Current Balance Sheet of Sanders Inc