Meyer Inc's assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?
A) $158,750
B) $166,688
C) $175,022
D) $183,773
E) $192,962

Question

Quizplus · Accepted Answer

Currently, the debt ratio for Meyer Inc. can be calculated as follows:
Debt Ratio = Total Debt / Total Assets = $185,000 / $625,000 = 0.296 or 29.6%

The new CFO wants to establish a debt ratio of 55%, so we can set up the following equation and solve for the amount of debt needed to achieve the target ratio:
55% = Total Debt / Total Assets
0.55 = Total Debt / $625,000
Total Debt = 0.55 x $625,000
Total Debt = $343,750

To find the amount of debt that needs to be added or subtracted, we can simply subtract the current total debt from the target total debt:
Target Debt - Current Debt = Amount to be added or subtracted
$343,750 - $185,000 = $158,750

Therefore, the company must add $158,750 in debt to achieve the target debt ratio of 55%.

Meyer Inc's Assets Are $625,000, and Its Total Debt Outstanding