Question

Hutchinson Corporation has zero debt - it is financed only with common equity. Its total assets are $330,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?Select the correct answer.a. $132,000.00 b. $131,986.90 c. $131,973.80 d. $131,960.70 e. $132,013.10

Answer 1

Answer:

firm must borrow $132,000 to achieve the target debt ratio

correct option is a. $132,000.00

Explanation:

given data

Total Assets = $330,000

Desired Debt/Assets Ratio = 40%

to find out

firm borrow to achieve the target debt ratio

solution

we get here funds to be borrowed through debt

Value of Debt = Total Assets × Desired Debt/Assets Ratio   ...........1

put here value we get  

Value of Debt = $330,000  × 40%

Value of Debt = $132,000

so that we can say firm must borrow $132,000 to achieve the target debt ratio

correct option is a. $132,000.00