Foundations Of Finance
Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 12, Problem 1RQ
Summary Introduction

To discuss: The amount of increase of Company A’s debt to total asset ratio by issuing new bond.

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Explanation of Solution

The common indicator of the use of borrowed funds and financial leverage of a firm is debt to total asset ratio.

In the year 2011, company A had $65 billion in borrowed funds relative to $270 billion in assets. This generates debt to total assets ratio of 24%. The additional borrowing of $3 billion in the year 2012 will increase the total borrowings to $68 billion.

It is to be noticed that company A did not paid any debt in the year 2011. Then the total asset will increase to $273 billion and the debt to total asset ratio of the firm will rise to 24.9% for an increase of marginally less than 1%.

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