Last year Mittel (Ottawa) had a total debt ratio of .31. This year the total debt ratio is .33. Which one of the following statements can be made with certainty based on this information?
A) The ﬁrm is bankrupt.
B) The ﬁrm increased its equity ﬁnancing.
C) The ﬁrm had to have sold some long-term assets.
D) The ﬁrm had to have borrowed more money.
E) The ﬁrm changed its capital structure.

Question

Quizplus · Accepted Answer

The increase in total debt ratio from .31 to .33 indicates a change in the capital structure of the firm, meaning there is a higher proportion of debt in relation to equity. This does not necessarily mean that the firm borrowed more money or sold long-term assets, as it could also be a result of a decrease in equity financing. Bankruptcy cannot be inferred from this information alone.

Last Year Mittel (Ottawa) Had a Total Debt Ratio of .31