The current balance sheet of Greyson Inc.reports total assets of $40 million, total liabilities of $4 million, and stockholders' equity of $36 million.Greyson is considering several financing possibilities in order to expand operations.What will be the effect on Greyson's debt to assets ratio if Greyson issues an additional $8 million in stock to finance its expansion?

Question

Quizplus · Accepted Answer

The debt to assets ratio is calculated by dividing total liabilities by total assets. Before the additional stock issuance, Greyson's debt to assets ratio is 4/40, or 0.1.

If Greyson issues an additional $8 million in stock, its total assets will increase to $48 million (from $40 million + $8 million). However, its total liabilities will remain the same at $4 million.

So the new debt to assets ratio will be 4/48, or 0.083. This is a decrease from the previous ratio of 0.1. Therefore, choice A is correct.

The Current Balance Sheet of Greyson Inc