Use the following information to answer the question(s)below.
Wyatt Oil has assets with a market value of $600 million,$70 million of which are cash.It has debt of $250 million,and 20 million shares outstanding.Assume perfect capital markets.
-If Wyatt Oil distributes the $70 million as a dividend,then its debt-to-equity ratio after the dividend will be closest to:
A)0.7.
B)0.9.
C)1.0.
D)1.1.

Question

Quizplus · Accepted Answer

Before the dividend, the value of equity is $600 million - $250 million = $350 million. 
After the dividend, the value of equity will remain the same but the cash will decrease by $70 million. Therefore, the debt-to-equity ratio will be: 
Debt-to-equity ratio = Debt / Equity = $250 million / $350 million - $70 million = 0.9. 
Therefore, the closest answer choice is B.

Use the Following Information to Answer the Question(s)below