Question

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

Answer 1

Answer:

Beranek Corp. should borrow $288,000 to achieve the target debt ratio.

Explanation:

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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