How did the stock market boom in the 1990s affect the debt ratio in terms of market values?

How did the stock market boom in the 1990s affect the debt ratio in terms of market values?

• A. The debt ratio increased significantly
• B. The debt ratio remained unchanged
• C. The debt ratio declined
• D. The debt ratio fluctuated significantly

Answer: (C)

The stock market boom in the 1990s had a notable impact on corporate balance sheets, particularly concerning the debt ratio, which is the proportion of a company's total debt to its total assets. As equity values soared during this period, companies experienced an increase in their market capitalization, thereby elevating the market value of their equity. When the value of equity increases significantly, while the total debt remains relatively stable or does not increase proportionally, the debt ratio declines. This is because the denominator in the debt ratio calculation (total assets, which are now higher due to increased equity values) increases more than the numerator (total debt), leading to a lower overall percentage of debt in relation to total assets. Therefore, the stock market boom, characterized by rising asset values, transformed corporate structures such that the relative burden of debt diminished in the context of higher market valuations, resulting in a declining debt ratio.

The stock market boom in the 1990s had a notable impact on corporate balance sheets, particularly concerning the debt ratio, which is the proportion of a company's total debt to its total assets. As equity values soared during this period, companies experienced an increase in their market capitalization, thereby elevating the market value of their equity.

When the value of equity increases significantly, while the total debt remains relatively stable or does not increase proportionally, the debt ratio declines. This is because the denominator in the debt ratio calculation (total assets, which are now higher due to increased equity values) increases more than the numerator (total debt), leading to a lower overall percentage of debt in relation to total assets.

Therefore, the stock market boom, characterized by rising asset values, transformed corporate structures such that the relative burden of debt diminished in the context of higher market valuations, resulting in a declining debt ratio.