Question

Beranek corp has $695,000 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?group of answer choices

O $219,620
O $278,000
O $344,720
O $294,680

Answer 1

Beranek Corp must borrow $278,000 to achieve a target debt ratio of 40%, using the formula Debt = Total Capital x Target Debt Ratio.

Step-by-step explanation:

The question is asking how much Beranek Corp must borrow to achieve a target debt ratio of 40%. Currently, the firm has $695,000 of assets, all financed with common equity, and no debt. To find the amount the firm must borrow, we'll calculate the desired amount of debt based on the targeted percentage of total capital.

The target total capital will still be $695,000, but after borrowing, the debt will represent 40% of that amount. To find the amount the firm needs to borrow, we can set up the following equation:

Debt / Total Capital = Target Debt Ratio
Debt / $695,000 = 0.40
Debt = $695,000 × 0.40
The firm therefore needs to borrow:

Debt = $278,000

After borrowing this amount, Beranek Corp will have a debt ratio of 40%, with the remainder of the capital being equity. The correct option in the final answer is $278,000.