A company has a debt-to-assets ratio of 0.45.If the company then borrows cash from the bank to finance a building acquisition,which of the following is a correct statement?
A)The debt-to-assets ratio will be unchanged.
B)The debt-to-assets ratio will increase.
C)The debt-to-assets ratio will decrease.
D)The debt-to-assets ratio will increase as a result of the cash received and then decrease as a result of the building acquisition.

Question

Quizplus · Accepted Answer

Debt-to-assets ratio = Total liabilities ÷ Total assets
Currently,the company's total liabilities are 45% of its total assets;as such,the numerator was less than the denominator when this ratio was calculated.Borrowing cash will increase the company's total liabilities and total assets by the same amount.The effect on the numerator will be greater since it is a smaller number,so the debt-to-assets ratio will increase.

A Company Has a Debt-To-Assets Ratio of 0