Question

A corporation has $50,000 in equity and a debt-to-total-assets ratio of 0.5. The firm wants to reduce this ratio to 0.2 by selling new common stock and using the proceeds to repay principal on outstanding long-term debt. What amount of additional equity financing must the corporation obtain to accomplish this objective?

Answer 1

Answer:

Equity is reduced = $30,000

Explanation:

given data

equity = $50,000

debt to total assets ratio = 0.5

reduce this ratio = 0.2

to find out

amount of additional equity financing must the corporation obtain to accomplish this objective

solution

we gave give Debt to Total assets ration

and Target Debt to Total assets i.e 0.2

so we get here Equity is reduced by here

Equity is reduced = $\frac{equity}{0.50}$ × ( debt to total assets ratio  - reduce ratio )

Equity is reduced =  $\frac{50000}{0.50}$ × ( 0.5 - 0.2 )

Equity is reduced = $30,000