Red Corp. has a rate of return on assets of 10% and a debt to equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(n):
A) Option A
B) Option B
C) Option C
D) Option D

Question

Red Corp. has a rate of return on assets of 10% and a debt to equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(n): 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Quizplus · Accepted Answer

Retiring debt reduces both assets and liabilities. Assets are the denominator in the return on assets, and liabilities are the numerator in the debt to equity ratio.

Red Corp Has a Rate of Return on Assets of 10