Question

Bostian, Inc. has total assets of $575,000. Its total debt outstanding is $185,000. The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio? Select the correct answer. a. $131,118 b. $131,250 c. $131,382 d. $131,316

Answer 1

Answer:

The company must add debt for an amount of $131,250.

Explanation:

The formula to calculate the debt-to-assets ratio is:

Debt-to-assets ratio= Total Liabilities/Total Assets

The company's  debt-to-assets ratio is:

Debt-to-assets ratio= $185,000/$575,000

Debt-to-assets ratio= 0,32*100= 32%

Then, to determine the total liabilities necessary to have a debt-to-assets ratio of 55%:

Total liabilities= Debt-to-assets ratio*Total Assets

Total liabilities= 0,55*$575,000

Total liabilities= $316,250

$316,250-$185,000= $131,250

To have a debt-to-assets ratio of 55%, the company must add debt for an amount of $131,250.