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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)
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