Pitt Corporation's Most Recent Balance Sheet Reports Total Assets of $35,000,000

question 155

Multiple Choice

Pitt Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?

• A) Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
• B) Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 1.0 to 1.3.
• C) Issuing the bonds would cause the firm's debt-to-equity ratio to remain unchanged.
• D) Issuing the bonds would cause the firm's debt-to-equity ratio to improve from .5 to .8.
• E) Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from .5 to .8.

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Definitions:

Confidence Level

A statistical measure that indicates the degree of certainty or trust in the results obtained from a sample as representative of a larger population.

Inference

The process of drawing conclusions about a population based on a sample.

Parameters

Statistical or mathematical conditions and variables that define the scope and functioning of a model, equation, or procedure.

Level of Significance

A threshold in hypothesis testing that determines the probability at which the null hypothesis is rejected.