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    Debt Ratio

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    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

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    Solution Preview

    Answer: A

    Total asset turnover = net sales/total assets, therefore total assets = net sales/total asset turnover.
    Current total assets = $750,000/7.5 = ...

    Solution Summary

    This solution looks at financing decisions in order to achieve the optimal debt ratio.