20 May, 07:04

# 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

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1. 20 May, 10:23
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The firm borrows \$288,000 to achieve the target debt ratio.

Option D is correct (\$288,000)

Explanation:

Given dа ta:

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)