Question

A company builds a new plant and finances its construction by issuing stock. Which ratio is least likely to be affected, all else being equal?

Answer 1

Current ratio will be least affected.

As the company builds a new plant, its net fixed assets will increase while current assets will remains same.It will also increase its total assets.

The financing is done through issuing stock. So, its shareholder's equity will increase while the liabilities (current and long term) will remains the same.

1. As the current assets and current liabilities do not change. Current ratio will not be affected.

2. As the debt is not changing while equity is changing, Debt to equity ratio will be affected.

3. Total assets are increasing while debt remains the same. So, Debt to assets ratio will be affected.

4. Fixed assets and total assets both are changing. So, the ratio will be affected.