A firm's goal is to maintain a 75% debt-equity ratio.How much equity would be required if the results of a financial planning model indicate that the firm's assets will grow to $4 million?

Question

Quizplus · Accepted Answer

To maintain a 75% debt-equity ratio, the debt is 0.75 times the equity. Let E be the equity, then debt is 0.75E. The total assets are the sum of debt and equity, so E + 0.75E = $4 million. Solving for E gives E = $2.29 million.

A Firm's Goal Is to Maintain a 75% Debt-Equity Ratio