Saffron Industries Most Recent Balance Sheet Reports Total Assets of $42,000,000

question 114

Multiple Choice

Saffron Industries most recent balance sheet reports total assets of $42,000,000, total liabilities of $16,000,000 and stockholders' equity of $26,000,000. Management is considering using
$3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any, would prepaying the bonds have on the company's debt-to-equity ratio?

• A) Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchanged.
• B) Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50.
• C) Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57.
• D) Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50.
• E) Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57.

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Definitions:

Insulin Secretion

The process by which the pancreas releases the hormone insulin in response to increased blood glucose levels.

Parasympathetic Stimulation

Activation of the parasympathetic nervous system, leading to responses such as decreased heart rate and increased digestive activity.

Acetylcholine Agonists

Substances that mimic the action of acetylcholine, a neurotransmitter, stimulating the acetylcholine receptor sites.

Sympathetic Stimulation

Activation of the sympathetic nervous system, which increases heart rate, blood pressure, and energy availability; often referred to as the "fight or flight" response.