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?
A) $219,620
B) $278,000
C) $344,720
D) $294,680
E) $247,420

Question

Quizplus · Accepted Answer

To achieve a 40% debt to total capital ratio, Beranek Corp needs to have 40% of its total capital as debt. Total capital is $695,000, so 40% of $695,000 is $278,000. Therefore, the firm must borrow $278,000.

Beranek Corp Has $695,000 of Assets (Which Equal Total Invested