C is corrent. First, the debt-to-equity ratio is calculated as follows:| Debt to equity = | Total liabilities Common stockholder’s equity |
The figures given in the problem reflect the account balances after the exercise of the stock options. Thus, Ali’s debt-to-equity ratio after the exercise isWhen the options were exercised, total stockholders’ equity would have increased by the amount of the option price as follows:Common stock increased by par value × 1,000 sharesPaid-in capital increased by (option price-par) × 1,000 sharesNote that the information given is incomplete as to whether compensation was recorded under the stock option plan. However, even if compensation were recorded the entries are made only to accounts that impact stockholders’ equity, and the net effect is no change. Thus, the only change is an increase resulting from the exercise of the options. Since common stockholders’ equity increased, the denominator of the debt-to-equity ratio also increased. As the denominator becomes larger and the numerator remains constant, the quotient becomes smaller. Therefore, the debt-to-equity ratio must have decreased to its current level of 12%.A is incorrect because the debt-to-equity ratio, rate of return on common stock, earnings per share, price-earnings ratio, and book value per share were all affected by exercising the stock options.B is incorrect because not enough information is given to calculate the asset turnover.D is incorrect because earnings per share decreased by $.15. |