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Debt ratio: Charter Enterprises

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Various capital structures: Charter enterprises currently has $3 million in total assets and is totally equity-based. It is contemplating a change in capital structure.

(Note: The amount of total assets would not change.)

a. Compute the amount of debt that would be outstanding if the firm were to shift to a debt ratio of 50%.

b. Compute the amount of equity that would be outstanding if the firm were to shift to a debt ratio of 50%.

c. Is there a limit to the debt ratio's value?

Please see attached document.

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Solution Summary

The solution provides step by step method for the calculation of amount of debt and equity based on the debt ratio. Formula for the calculation is also included.

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