A company's debt-to-assets ratio can worsen (i.e. increase) if ONE of the following is done:Select one:a. Repurchases Common Stock Outstandingb. Issues more common stockc. Shift long-term to short-term debtd. Shift short-term to long-term debt
Question
A company's debt-to-assets ratio can worsen (i.e. increase) if ONE of the following is done:Select one:a. Repurchases Common Stock Outstandingb. Issues more common stockc. Shift long-term to short-term debtd. Shift short-term to long-term debt
Solution 1
The correct answer is c. Shift long-term to short-term debt.
Here's why:
a. Repurchasing Common Stock Outstanding: This action reduces the company's equity, not its debt. Therefore, it does not directly affect the debt-to-assets ratio.
b. Issues more common stock: This action increases the company's equity, not its debt. Therefore, it does not directly affect the debt-to-assets ratio.
c. Shift long-term to short-term debt: This action can worsen the debt-to-assets ratio. Short-term debt is often viewed as more risky because it needs to be paid back sooner. Therefore, if a company shifts its long-term debt to short-term debt, it could be seen as having a higher risk of default, which could increase its debt-to-assets ratio.
d. Shift short-term to long-term debt: This action can actually improve the debt-to-assets ratio. Long-term debt is often viewed as less risky because it does not need to be paid back as quickly. Therefore, if a company shifts its short-term debt to long-term debt, it could be seen as having a lower risk of default, which could decrease its debt-to-assets ratio.
Solution 2
The correct answer is c. Shift long-term to short-term debt.
Here's why:
a. Repurchasing Common Stock Outstanding: This action reduces the company's equity, not its debt. Therefore, it does not directly affect the debt-to-assets ratio.
b. Issues more common stock: This action increases the company's equity, not its debt. Therefore, it does not directly affect the debt-to-assets ratio.
c. Shift long-term to short-term debt: This action can worsen the debt-to-assets ratio. Short-term debt is often viewed as more risky because it needs to be paid back sooner. Therefore, if a company shifts its long-term debt to short-term debt, it could be seen as having a higher risk of default, which could increase its debt-to-assets ratio.
d. Shift short-term to long-term debt: This action can actually improve the debt-to-assets ratio. Long-term debt is often viewed as less risky because it does not need to be paid back as quickly. Therefore, if a company shifts its short-term debt to long-term debt, it could be seen as having a lower risk of default, which could decrease its debt-to-assets ratio.
Similar Questions
According to MM II, as a firm's debt-to-equity ratio increases: its financial risk increases. its operating risk increases. the expected return on equity increases. the expected return on equity decreases.
A debt to total assets ratio of 80%:Group of answer choicesmeans that 20% of investment in assets has been provided by lenders.is undesirable for creditors .is desirable for creditors.is likely to be supported by cyclical entities that have fluctuating profits, such as many high-tech companies. PreviousNext
When is a high debt to equity ratio be positive for a company's financial health and share price?1 pointIf the earnings growth that the borrowed money generates is HIGHER than the cost of borrowing itIf the earnings growth that the borrowed money generates is LOWER than the cost of borrowing itIf the company does not borrow any money
If a firm increases the proportion of debt in the capital structure:A.The cost of debt will increase but there will be no impact on the cost of equity.B.The cost of equity and the cost of debt will both increase, but its cost of capital will fall.C.The cost of equity will increase, but the impact on the firm’s cost of capital is unclear in the absence of specific information about financial distress costs and the firm’s tax position.D.The cost of equity will increase but the cost of debt will decrease.
ratios measure a company's ability to turn assets into cash to pay its short-term debt.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.