What will be the effect on Apex's debt ratio if Apex's owner invests an additional $2 million to finance its expansion?
A) The debt ratio will decrease from .1 (2/20) to .0909 (2/22) after the additional investment.
B) The debt ratio will decrease from 2/9 before to 2/11 after the additional investment.
C) The debt ratio will increase from 20 before to 22 after the additional investment.
D) Additional investment by owner will have no effect on the debt ratio.

Question

Quizplus · Accepted Answer

The debt ratio is calculated as total debt divided by total assets. If Apex's owner invests an additional $2 million, it will increase the total assets by that amount. However, it will not change the total debt, as the owner's investment is equity and not considered debt. Therefore, the debt ratio will decrease, as the denominator (total assets) increases while the numerator (total debt) remains the same. The correct calculation would be 2/22, resulting in a debt ratio of .0909. Choice A is the only option that reflects this change in the debt ratio.

What Will Be the Effect on Apex's Debt Ratio If