Meyer Inc's total invested capital is $670,000,and its total debt outstanding is $185,000.The new CFO wants to establish a total debt to total capital ratio of 55%.The size of the firm will not change.How much debt must the company add or subtract to achieve the target debt to capital ratio?

Question

Quizplus · Accepted Answer

Total capital = Total invested capital + Total debt outstanding
Total capital = $670,000 + $185,000 = $855,000
Target debt to capital ratio = 55%
Hence, Target total debt = 55% of total capital = 0.55 * $855,000 = $470,250
To achieve the target, the company needs to adjust its debt by:
$470,250 - $185,000 = $285,250
To decrease the debt by $285,250, the company would need to repay that amount. To increase the debt, it would need to borrow that amount. 
Therefore, the company must subtract $285,250 from its total debt outstanding, which is $185,000. 
Thus, the company needs to reduce its debt by $100,500 ($285,250 - $185,000), and the new total debt outstanding will be $84,500 ($185,000 - $100,500). 
So, the amount of debt the company must subtract to achieve the target debt to capital ratio is $100,500 or Choice B.

Meyer Inc's Total Invested Capital Is $670,000,and Its Total Debt