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