Question

A pro forma balance sheet indicates that total assets will increase by $300,000. If a debt-equity ratio of .5 is maintained, then debt must increase by _____.

Answer 1

Answer:

Debt must increase by $100,000

Explanation:

The debt-equity ratio that shows how an organisation's asset is financed by a mixture of shareholders' equity and debt (loans). It can also be called the gearing or risk ratio of financing.

The formula for calculating the debt-equity ratio is total liabilities/shareholders' equity.

The question already states that the debt-equity ratio is 0.5

Therefore, if the company's total asset will increase by $300,000, it means the breakdown of the $300,000 is that debt will increase by $100,000 and equity will increase by $200,000.

How is this derived debt= $100,000,  Equity = $200,000

= $100,000/$200,000= 0.5 which is the debt-equity ratio.