The current balance sheet of Apex reports total assets of 44

The current balance sheet of Apex reports total assets of $44 million, total liabilities of $14 million, and owners\' equity of $30 million. Apex is considering several financing possibilities in order to expand operations. Assume Apex borrows $6 million to finance its expansion. Apex\'s debt ratio immediately after the borrowing will be:

0.14

0.45

0.87 (rounded).

0.40 (rounded).

Solution

D. 0.40

Debt ratio = Total liabilities / Total assets = ($14 million + $6 million) / ($44 million + $6 million) = $20 million / $50 million = 0.40