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There was an upward trend in the ratio of the book value of debt to the...

There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by:

Group of answer choices

None of the three statements.

a large increase in the market value of equity that was greater than the increase in debt.

the difference between tax accounting and accounting for financial accounting purposes.

the change in the accounting rules of the period.

All of the three statements.

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Answer #1

Ans a large increase in the market value of equity that was greater than the increase in debt.

There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by a large increase in the market value of equity that was greater than the increase in debt.

For an optimum portfolio it is important to keep a good mix of debt and equity. This helps in reducing overall cost of capital and helps in keeping enough funds in the company.

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