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19 May, 02:46

Bostian, Inc. has total assets of $575,000. Its total debt outstanding is $185,000. The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio? Select the correct answer. a. $131,118 b. $131,250 c. $131,382 d. $131,316

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  1. 19 May, 04:14
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    The company must add debt for an amount of $131,250.

    Explanation:

    The formula to calculate the debt-to-assets ratio is:

    Debt-to-assets ratio = Total Liabilities/Total Assets

    The company's debt-to-assets ratio is:

    Debt-to-assets ratio = $185,000/$575,000

    Debt-to-assets ratio = 0,32*100 = 32%

    Then, to determine the total liabilities necessary to have a debt-to-assets ratio of 55%:

    Total liabilities = Debt-to-assets ratio*Total Assets

    Total liabilities = 0,55*$575,000

    Total liabilities = $316,250

    $316,250-$185,000 = $131,250

    To have a debt-to-assets ratio of 55%, the company must add debt for an amount of $131,250.
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