Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 2 - A Further Look at Financial Statements - Questions: 8

Answer

When a company issues common stock, it is raising the equity. However, when a company takes a debt it it increasing the debt. Therefore, taking a debt increases the riskiness.

Work Step by Step

A company's riskiness is determined by the ratio of the debt to the assets of the ratio of the debt to the equity. The lower it is, the better it is. When Tom Sands takes debt to finance the business, the debt to assets ratio and the debt to equity ratio is increasing, indicating increase in riskiness. Increasing the equity by issuing common stock does not increase riskiness.
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