Grindle Ltd has total assets of $1.5 million and liabilities of $0.9 million before it issues $300 000 in preference shares.What is the debt-to-asset ratio assuming that the preference shares have no voting rights and offer a fixed dividend rate of 10% and (a)are redeemable at the discretion of the issuer and (b)have a scheduled date for mandatory redemption?
A) (a) 60%; (b) 80%
B) (a) 50%; (b) 67%
C) (a) 80%; (b) 60%
D) (a) 67%; (b) 50%

Question

Quizplus · Accepted Answer

The debt-to-asset ratio is calculated as total liabilities divided by total assets. Before issuing preference shares, the ratio is $0.9 million / $1.5 million = 60%. After issuing preference shares, if they are considered equity (a), the total assets increase to $1.8 million, making the ratio $0.9 million / $1.8 million = 50%. If the shares are considered debt (b), liabilities increase to $1.2 million, making the ratio $1.2 million / $1.8 million = 67%.

Grindle Ltd Has Total Assets of $1