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

Question

Quizplus · Accepted Answer

The debt-to-equity ratio is calculated by dividing the total liabilities by the owners' equity. Currently, the debt-to-equity ratio is 2 million/18 million=0.111. If the owner invests an additional $2 million, the new owners' equity will be $20 million, and the debt-to-equity ratio will be 2 million/20 million=0.1. This means that the debt-to-equity ratio will decrease. Therefore, the correct answer is B.

The Current Balance Sheet of Blawnox Inc