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29 September, 05:25

Southern Corp. has a debt-to-equity ratio of 1.75 and total assets of $275 million. Southern is considering issuing another $20 million of debt and another $20 million of equity. What will be Southern's debt-to-equity ratio after the issuance?

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  1. 29 September, 05:51
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    1.625

    Explanation:

    Debt to equity ratio = Debt : Equity

    or

    1.75 = Debt : Equity

    or

    Debt = 1.75 * Equity

    also,

    Total assets = Debt + Equity

    or

    $275 million = 1.75 * Equity + Equity

    or

    $275 million = 2.75 * Equity

    or

    Equity = $100 million

    Therefore,

    Debt = $275 million - Equity

    = $275 million - $100 million

    = $175 million

    Now,

    after issuance,

    Total debt = $175 million + $20 million

    = $195 million

    and,

    Equity = $100 million + $20 million

    = $120 million

    Therefore,

    Southern's debt-to-equity ratio after the issuance

    = $195 million : $120 million

    = 1.625
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