Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?
A) Issuing the bonds would cause the firm's debt-to-equity ratio to remain unchanged.
B) Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
C) Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from .5 to .8.
D) Issuing the bonds would cause the firm's debt-to-equity ratio to improve from .5 to .8.
E) Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 1.0 to 1.3.

Question

Quizplus · Accepted Answer

Issuing the bonds increases total liabilities to $22,500,000. Equity is $17,500,000 ($35,000,000 - $17,500,000). The new debt-to-equity ratio is $22,500,000 / $17,500,000 = 1.29, worsening from the original 1.0.

Seedly Corporation's Most Recent Balance Sheet Reports Total Assets of $35,000,000