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    Question

    All else being equal, an infusion of additional equity

    capital into a company will generally:
    A Improve the company’s credit profile Correct Answer Incorrect Answer
    B Have no impact on the company’s credit profile Correct Answer Incorrect Answer
    C Worsen the company’s credit profile Correct Answer Incorrect Answer
    D Either (a) or (b), depending on the industry sector Correct Answer Incorrect Answer
    E Either (b) or (c), depending on debt levels Correct Answer Incorrect Answer

    Solution

    • When a company raises fresh equity, its net worth increases. • This reduces the debt-to-equity ratio, strengthens capital adequacy, and improves the company’s ability to absorb financial shocks. • From a lender’s perspective, higher equity means lower credit risk, as the company has more owner-funded capital at stake. • Hence, the infusion of equity positively impacts the credit profile. Thus, the correct answer is that equity infusion improves the company’s credit profile.

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