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Annie Kavitha
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Rolle Corp has $500,000 of assets, and it uses no debt-- it

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Rolle Corp has $500,000 of assets, and it uses no debt-- it is financed only with common equity. The new CFO wants to employ enough debt to bring the Debt/Assets ratio to 45%, 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?
Submitted: 7 years ago.
Category: Finance
Expert:  Annie Kavitha replied 7 years ago.

HelloCustomer

 

At present:

 

Total assets = 500,000 = total equity

 

If debt is to be employed:

 

Debt/ Assets ratio which would be maintained = 45%

 

Debt/ 500,000 = 0.45

 

Debt = 500,000 * 0.45

 

= $225,000

 

Thus the firm should borrow $225,000 of debt and buy back the common stock with it and maintain the debt/assets ratio of 45%.

 

 

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