Series 79 practice questionmediumLeverage Ratios
A company issues new debt and uses all proceeds to repurchase common stock. What is the most likely effect on its debt-to-equity ratio?
- AIt decreases
- BIt increases✓ Correct answer
- CIt remains unchanged
- DIt cannot be calculated even with the transaction details
Explanation
Why B — It increases
Debt rises while common equity falls, so the debt-to-equity ratio increases. Using the debt proceeds for the repurchase can leave total assets approximately unchanged at transaction close.
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