Saffron Industries most recent balance sheet reports total assets of $42,000,000, total liabilities of $16,000,000 and stockholders' equity of $26,000,000. Management is considering using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any, would prepaying the bonds have on the company's debt-to-equity ratio?
A. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50.
B. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50.
C. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57.
D. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57.
E. Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchanged.
Answer: A
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