Hutchinson Corporation has zero debt ⎯it is financed only with common equity. Its total assets are $410,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

Question

Tiana Mckinney

Business

4 November, 11:30

Hutchinson Corporation has zero debt ⎯it is financed only with common equity. Its total assets are $410,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

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Answers (1)

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Jayson · Answer 1

Required Debt = $164,000

Explanation:

Debt to asset ratio also called debt ratio is a leverage ratio and is calculated by dividing debt divided by total assets. It is used to measure solvency.

For Hutchinson Corporation

Target debt ratio = 40%

Total assets = $410,000

Debt ratio = Debt/Total assets

0.40 = Debt / 410,000

Debt = 410,000 * 0.40

Debt = $164,000