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

After repurchasing $10 million of its stock, the firm's equity decreases by $10 million. The new equity is calculated as total assets minus cash used for repurchase minus debt. Initially, equity is $250 million - $100 million = $150 million. After repurchasing, equity becomes $150 million - $10 million = $140 million. The new debt-to-equity ratio is $100 million / $140 million = 0.714 or 71.4%.

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