The Altman Company has a debt ratio of 33.33 percent, and it needs to raise $100,000 to expand. Management feels that an optimal debt ratio would be 16.67 percent. Sales are currently $750,000, and the total assets turnover is 7.5. How should the expansion be financed so as to produce the desired debt ratio?
a. 100% equity
b. 100% debt
c. 20 percent debt, 80 percent equity
d. 40 percent debt, 60 percent equity
e. 50 percent debt, 50 percent equity
Total asset turnover = net sales/total assets, therefore total assets = net sales/total asset turnover.
Current total assets = $750,000/7.5 = ...
This solution looks at financing decisions in order to achieve the optimal debt ratio.