Question

A company makes $1 million in after-tax profits for the year. It spends the entire amount on new equipment. Which of the following is true?

a. Its leverage ratio at the end of the year is higher than it was one year before
b. Its retained earnings for the year equal zero.
c. Its book value at the end of the year is $1 million greater than that of one year before.
d. Its book value at the end of the year is the same as that of one year before.

Answer 1

Answer:

c. Its book value at the end of the year is $1 million greater than that of one year before.

Explanation:

When the entire retained earnings of $1 million are spent on buying the equipment, then company's assets will rise by $1 million and similarly, its equity will also rise by $1 million. So, Company' s book value at the end of the year will be $1 million greater than that of one year before.