The Altman Co. has a debt ratio of 33.33% and it needs to raise $100,000 to expand. Mangement feels that an optimaldebt ratio would be 16.67%. Sales are currently $750,000, and the total assets turnover is 7.5. How should the expansion be financed to achieve the desired debt ratio?
a) 100% equity
b) 100% debt
c) 20% debt, 80%equity
d) 40% debt, 60% equity
e) 50% debt 50% equity
Total asset turnover = Sales/Assets
Assets = 750,000/7.5 = 100,000.
Debt ratio = Total debt/total ...
The solution explains how to determine the financing so as to achieve the desired debt ratio.