Question

A firm has assets of $235 million, of which $24 million is cash. It has debt of $104 million. If the firm were to use its cash reserves to repurchase $9.6 million of its stock, what would its new debt-to-equity ratio be?

Answer 1

Solution :-

Before repurchase of stock :-

Total Asset = $235 million

Debt = $104 million

So, Equity = Total Asset - Debt

= $235 million - $104 million

= $131 million

After repurchasing of stock worth $9.6 million using cash reserves :-

Total Assets would be $235 million - $9.6 million = $225.4 million

Total Equity would be $131 million - $9.6million = $121.4 million

While Debt would be be $104 million

so, new debt to equity ratio would be :-

= Debt / Equity

= $104 million / $121.4 million

= 0.856672158

Or 85.67% (approx)