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The current balance sheet of Apex reports total assets of $20 million,total liabilities of $2 million,and owners' equity of $18 million.Apex is considering several financing possibilities in order to expand operations.Each question based on this data is independent of any others.
-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 0.1 (2 ÷ 20)to 0.0909 (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

Debt Ratio = Total Liabilities / Total Assets

Before additional investment: 
Debt Ratio = 2 / 20 = 0.1

After additional investment: 
Total Assets = $20 million + $2 million = $22 million
Owners' Equity = $18 million + $2 million = $20 million
Total Liabilities = $2 million

Debt Ratio = 2 / 22 = 0.0909

Therefore, the debt ratio will decrease from 0.1 to 0.0909 after the additional investment.

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