Question

KCE Corporation is currently operating at its target capital structure with market values of $140 million of equity and $155 million of debt. KCE plans to finance a new $25 million project while maintaining the current debt-equity ratio. How much new debt must be issued to fund the project?A) $13.1 millionB) $18.5 millionC) $19.6 millionD) $24.8 millionE) $32.0 million

Answer 1

Option (a) is correct.

Step-by-step explanation:

Given that,

Equity = 140 Millions

Debt = 155 Millions

Debt Equity Ratio = Debt ÷ Equity

= 155 Millions ÷ 140 Million

= 1.11

KCE is financing its new project with 25 Millions

Let the New debt issued by x and the New equity financed be (25-x) .

Debt Equity Ratio = Debt ÷ Equity

1.11 = (155 + x) ÷ (140 + 25 - x)

1.11 = (155 + x) ÷ (165 - x)

183.15 - 1.11x = 155 + x

28.15 = 2.11 x

x = 13.34

Option (a) is the most nearest to this answer.

New Debt = 155 + 13.34

= 168.34 Millions

New Equity = 140 + 11.66

= 151.66 Millions