Which of the following company actions will have no effect on its Leverage Ratio? a) It issues (sells) new equity shares and uses the money to purchase equipment b) It issues (sells) new equity shares and uses the money to pay off exactly that amount in bank loans c) It issues (sells) a bond and uses the money to pay off exactly that amount in bank loans d) It issues (sells) a bond and uses the money to return to owners

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Business

Veronica Dickerson

24 December, 16:46

Which of the following company actions will have no effect on its Leverage Ratio? a) It issues (sells) new equity shares and uses the money to purchase equipment b) It issues (sells) new equity shares and uses the money to pay off exactly that amount in bank loans c) It issues (sells) a bond and uses the money to pay off exactly that amount in bank loans d) It issues (sells) a bond and uses the money to return to owners

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Dulce Bullock · Answer 1

c) It issues (sells) a bond and uses the money to pay off exactly that amount in bank loans

Explanation:

A company's leverage ratio measures the amount of capital that comes from debt.

The most common leverage ratio is the debt-equity ratio, calculated using the following formula:

Debt-Equity Ratio = Long-term debt/shareholders' equity

Because in this case, the firm is issuing a bond to pay off exactly what it owes to the bank, the leverage ratio is unaffected because no new debt is being issued. (in fact, debt is going down).