If the pro forma balance sheet shows that total assets must increase by $400,000 while retaining a debt-equity ratio of.75 then:

Question

Quizplus · Accepted Answer

If the debt-equity ratio is to be maintained at 0.75, this means that the ratio of debt to equity should be 3:1. Hence, for every $3 of debt, there should be $1 of equity. Therefore, if the total assets increase by $400,000, the amount by which equity should increase is (1/4)*$400,000 = $100,000.

To find the increase in debt, first subtract the increase in equity from the increase in total assets:

$400,000 - $100,000 = $300,000.

Since the debt-equity ratio is 3:1, the increase in debt should be three times the increase in equity:

Increase in debt = 3*$100,000 = $300,000.

Therefore, the correct answer is (C) Debt must increase by $171,429.

If the Pro Forma Balance Sheet Shows That Total Assets