Question

Beranek Corp has $665,000 of assets, and it uses no debt--it is financed only with common equity. The new CFO wants to employ enough debt to raise the debt/assets 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?

Answer 1

$266,000

Step-by-step explanation:

Since Beranek Corp has no liabilities, its total assets = $665,000 = total equity

The target debt / assets ratio set by the new CFO = 40%

40% of equity = 40% x $665,000 = $266,000

therefor the corporation must rebuy $266,000 worth of stock, and its new balance sheet would be:

Assets Liabilities

$665,000 $266,000

Equity

$399,000