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A company has a debt-to-assets ratio of 0.45 and a return on equity ratio of 10%. If the company then issues additional shares of common stock for cash, which of the following is a correct statement?
A. The debt-to-assets ratio will decrease and the return on equity ratio will increase.
B. The debt-to-assets ratio will decrease and the return on equity ratio will decrease.
C. The debt-to-assets ratio will not change and the return on equity ratio will not change.
D. The debt-to-assets ratio will increase and the return on equity ratio will increase.

Respuesta :

Both the return on equity ratio and the debt-to-assets ratio will drop. The correct response is option (B).

Define debt-to-assets ratio.

The ratio of debt to total assets shows how much of a company's assets are owned by creditors vs shareholders (those from whom it has borrowed money). It is one of three calculations used to evaluate debt capacity, along with the debt servicing ratio and the debt-to-equity ratio.

A metric used to assess a company's profitability relative to its equity is the return on equity. Since shareholder's equity may be calculated by adding up all assets and subtracting all obligations, ROE can also be thought of as a return on assets less liabilities.

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