Bermaa Company is financed only with common equity

Finance Oct 15, 2020

Bermaa Company is financed only with common equity. Its total assets are $590,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 30%, using the proceeds from the borrowing to buy back common stock at its book value. How much mustthe firm borrow to achieve the target debt ratio?

Expert Solution

Computation of the borrowed amount:-

Target debt ratio = Debt / Assets

30% = Debt / $590,000

Debt = $590,000 * 30%

= $177,000

Hence, the firm must borrow amount to achieve the target debt ratio = $177,000

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