Beranek corp has $720,000 of assets, and it uses no debt--it is financed only with common equity. the new cfo wants to employ enough debt to raise the debt/assets ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. how much must the firm borrow to achieve the target debt ratio? a. $273,600b. $288,000c. $302,400d. $317,520e. $333,396
Debt to asset ratio measure the percentage of asset financed by the debt portion. It is also express the percentage of debt in the total capital of the firm.
Total Assets = $720,000
Debt asset ratio = 40%
Debt to Asset ratio = Debt / Asset
40% = Debt / $720,000
Debt = $720,000 x 40%
Debt = $288,000
Beranek Corp. should borrow $288,000 to achieve the target debt ratio.
40% of debt-to-asset ratio means that 40% of the assets should be Financed with debt and the remaining with equity. We have $720,000 worth of assets, simply multiply it with 40% and you will get the amount the needs to be borrowed.
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