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    Question

    Other things remaining the same, infusion of fresh

    equity will ______ the credit profile of a company.
    A Improve Correct Answer Incorrect Answer
    B Not impact Correct Answer Incorrect Answer
    C Deteriorate Correct Answer Incorrect Answer
    D A or B depending on the amount of capital Correct Answer Incorrect Answer
    E B or C depending on the amount of capital Correct Answer Incorrect Answer

    Solution

    • Equity infusion increases the net worth of the company. • This enhances the company’s capital adequacy and reduces the debt-to-equity ratio. • A stronger capital structure means the company has greater capacity to absorb shocks, repay obligations, and take on new credit if needed. • As a result, credit rating agencies and lenders view equity infusion as a positive development for the company’s credit profile. Thus, infusion of fresh equity generally improves a company’s credit profile.

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