Question

If an all equity firm with $642,403 equity wants to issue debt and raise the debt ratio to 0.27 without any change in total assets, by retiring some of the equity with the proceeds of the debt issue, how much to they need to borrow?  Hint: Ask yourself what  the total assets are of this all-equity firm before they issue any debt.?  Answer  to the nearest dollar, omitting the dollar sign.

Answer 1

It was an all equity firm so there was no debt at the present structure.It will have to reduce the equity in order to increase the debt.

If they are wanting to to raise the total debt ratio to .27.

Debt ratio=

.27= debt/total capital

It can be said that total assets will be remaining the same as required in question.

Total capital will be comprised of of debt as well as equity ratio.

Let the debt capital be X.

.27= X/ (debt +equity)

.27= X/642403

X= (642403*.27)=173,449

They will have to borrow $173,449