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17 July, 13:54

Beranek Corp has $855,000 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?

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  1. 17 July, 14:09
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    To achieve the target debt ratio the firm must borrow $342,000

    Explanation:

    Data provided in the question:

    Total invested capital = $855,000

    Required Debt to total capital ratio = 40%

    Now,

    The Debt to total capital ratio is calculated as:

    = [ Debt : Total invested capital ] * 100%

    thus,

    according to the question

    40% = [ Debt : $855,000 ] * 100%

    or

    Debt : $855,000 = 0.40

    or

    Debt = 0.40 * $855,000

    or

    Debt = $342,000

    Hence,

    To achieve the target debt ratio the firm must borrow $342,000
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