Question

Meyer Inc's total invested capital is $660,000, and its total debt outstanding is $185,000. The new CFO wants to establish a total debt to total capital ratio of 55%. The size of the firm will not change. How much debt must the company add or subtract to achieve the target debt to capital ratio

Answer 1

$178,000

Step-by-step explanation:

Calculation for How much debt to achieve the target debt ratio

First step is to find the Target amount of debt using this formula

Target amount of debt =Target debt percentage ×Total assets

Let plug in the formula

Target amount of debt =55%× $660,000

Target amount of debt=$363,000

Second step is to calculate for the Change in the amount of debt outstanding using this formula

Change in amount of debt outstanding = Target debt -Old debt

Let plug in the formula

Change in amount of debt outstanding =$363,00-$185,000

Change in amount of debt outstanding =$178,000

Therefore How much debt to achieve the target debt ratio will be $178,000