Question

Which of the following transactions or events would have no immediate effect on the times interest earned ratio but will cause debt to equity ratio to decrease?

a. issuing new debt
b. issuing new equity
c. having a stock split
d. recording large contingent liability for lawsuit

Answer 1

b. issuing new equity

Step-by-step explanation:

debt to equity ratio = Total debt/ Total equity x 100

and

interest earned ratio = Operating Income ÷ Interest charge

Ways to decrease debt to equity ratio :

1. Increase equity (no effect on interest earned ratio)

2. Decrease debt (increases interest earned ratio)

thus,

issuing new equity have no immediate effect on the times interest earned ratio but will cause debt to equity ratio to decrease.