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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Business

Jair Hatfield

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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Answers (1)

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Carelyn · Answer 1

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.