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 the original assets minus debt minus the $10 million used for repurchasing, which equals $250 million - $100 million - $10 million = $140 million. The debt remains at $100 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