Question

Suppose the stock price of Bellywood Co. increases by 15%. What impact will it have on its market-to-debt ratio if nothing changes in the company’s balance sheet?

A) Increase
B) Decrease
C) No change
D) Uncertain

Answer 1

An increase in the stock price of Bellywood Co. by 15% leads to an increase in the company's market-to-debt ratio, assuming there are no changes to the company's balance sheet.

Step-by-step explanation:

If the stock price of Bellywood Co. increases by 15% while nothing changes on the company’s balance sheet, the impact on its market-to-debt ratio would be an increase. The market-to-debt ratio is calculated by taking the market value of a company (which includes its equity value) and dividing it by the total debt. An increase in the stock price raises the numerator (market value) of this ratio, assuming the denominator (total debt) remains constant. Therefore, with other factors remaining unchanged, a higher stock price leads to a higher market-to-debt ratio.