Beranek Corp has $720,000 of assets (which equal total invested capital), and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital 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? Group of answer choices $333,396 $273,600 $302,400 $288,000 $317,520

The firm borrows $288,000 to achieve the target debt ratio.

Option D is correct ($288,000)

Explanation:

Given Data:

Assets (equal total invested capital)=$720,000

The total debt to total capital ratio=40%=0.40.

Required:

How much must the firm borrow to achieve the target debt ratio?

Solution:

Amount borrowed=Assets*The total debt to total capital ratio

Amount borrowed=$720,000*0.4

Amount borrowed=$288,000

The firm borrows $288,000 to achieve the target debt ratio.

Option D is correct ($288,000)