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 will
A) stay the same
B) decrease
C) increase
D) cannot be determined from this information.

Question

Quizplus · Accepted Answer

If the owner invests an additional $2 million, the total assets will increase to $22 million and the owners' equity will increase to $20 million. Since the total liabilities remain the same at $2 million, the debt to equity ratio will decrease from 0.11 (2/18) to 0.1 (2/20). Therefore, the correct choice is B) decrease.

The Current Balance Sheet of Blawnox Inc