A firm has assets of $250 million,of which $25 million is cash.It has debt of $100 million.If the firm were to repurchase $10 million of its stock,what would its new debt-to-equity ratio be?

Question

Quizplus · Accepted Answer

The firm's equity can be calculated as: Equity = Assets - Debt = $250 million - $100 million = $150 million.

If the firm repurchases $10 million of stock, its new equity would be: New Equity = Initial Equity - Stock Repurchase = $150 million - $10 million = $140 million.

The new debt-to-equity ratio can be calculated as: Debt-to-Equity Ratio = Debt / Equity = $100 million / $140 million = 0.714 or 71.4%.

Therefore, the best answer is B) 28.6% because this is the closest answer to the correct answer.

A Firm Has Assets of $250 Million,of Which $25 Million