The Altman Company has a debt ration of 33.33 percent, and it needs
raise $100,000 to expand. Management feels that an optimal debt ratio
would be 16.67 percent. Sales are currently $750,000, and the total
assets turnover is 7.5. How should the expansion be financed so as to
produce the desired debt ratio?





0 	0% 	A . 	100% equity
0 	0% 	B . 	100% debt
0 	0% 	C . 	20 percent debt, 80 percent equity
0 	0% 	D . 	40 percent debt, 60 percent equity
0 	0% 	E . 	50 percent debt, 50 percent equity

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Request for Question Clarification by omnivorous-ga on 17 Dec 2002 08:38 PST

Jucylove --

The assets of the company could be any amount -- for example $500,000
-- and still be turning 7.5 times.  There isn't enough information to
solve this problem unless one knows the current asset level.

Best regards,

Omnivorous-GA

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Clarification of Question by jucylove-ga on 17 Dec 2002 09:42 PST

I am told that the assets turnover should give us this info.

jucylove -

well, this one works out nicely as follows - 

Debt Ratio = Total Liabilities / Total Assets = L / A = 0.3333

Asset Turnover = Sales / Total Assets = 750,000 / A = 7.5
 
Therefore, A = $100,000

From the Debt Ratio equation above we calculate -

L = A * 0.3333 = $33,333 which is the current debt level.

To achieve a debt ratio of 16.67% -

(Debt + 33,333) / 200,000 = 0.1667

Total assets increased to $200,000 because we are receiving financing
for the project.

Solving the equation yields Debt = 0

To maintain the 16.67% ratio, therefore, you'd want to do the entire
financing in equity - 100% equity, (A)

thanks,
ragingacademic

Fantastic, my bestest friend!