Question

A firm currently has 600 in debt for every 1,000 in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. What will decrease as a result of this action?

Answer 1

When a firm decreases its debt while maintaining its current equity and net income, the debt-to-equity ratio will decrease.

Step-by-step explanation:

When a firm decreases its debt while maintaining its current equity and net income, the debt-to-equity ratio will decrease. In this case, the firm currently has $600 in debt for every $1,000 in equity, which means the debt-to-equity ratio is 0.6. If the firm uses some of its cash to decrease its debt, let's say the debt becomes $500, while the equity remains at $1,000. The new debt-to-equity ratio would be 0.5, indicating a decrease in the ratio.