Martinez Brothers Imports has a current debt ratio of 33.33 percent, and it needs to raise $100,000 to expand production. Management feels that its current debt ratio is too high and that an optimal debt ratio would be 16.67 percent. Sales are currently $750,000, and its total assets turnover is 7.5. How should its expansion be financed so Martinez reaches its desired debt ratio?
A) 100% equity
B) 20% debt, 80% equity
C) 40% debt, 60% equity
D) 60% debt, 40% equity
E) 100% debt

Question

Quizplus · Accepted Answer

To achieve a desired debt ratio of 16.67%, Martinez Brothers Imports should finance the expansion entirely with equity. This approach will help lower the overall debt ratio from its current level of 33.33% towards the target of 16.67%, as adding debt would increase the debt ratio instead of decreasing it.

Martinez Brothers Imports Has a Current Debt Ratio of 33