Question

If Company XYZ sells $1,000,000 in assets to pay down $1,000,000 in debt, what impact would this have on the company’s debt to total assets ratio?A) It would increaseB) It would decreaseC) It would stay the sameD) We don’t have enough information to decide

Answer 1

Answer:

B) It would decrease

Explanation:

Suppose that Company XYZ assets before the sale of assets were $2,000,000 and is total debts were $1,500,000. The debt to asset ratio before the sale of assets were:

Debt/Asset ratio=$1,500,000/$2,000,000=0.75

Now the Company XYZ has decided to sell the the assets worth $1,000,000 to pay Debts so the assets now will become $1,000,0000 while the Debts now will become $500,000 and accordingly the debt to asset ratio will be calculated as follows:

Debt/Asset ratio=$500,000/1,000,000=0.50

So based on the above discussion, the answer shall be B) It would decrease