D/E = 0.6667
D/(A-D) = 0.6667
(A-D)/D = 1/0.6667
A/D - 1 = 1/0.6667
A/D = 2.4999
Substituting for A which is given as 1 million we get the value of debt which will be
D = 1,000,000/2.4999 = 400,160
This in turn gives us the value of E which D/E = 0.6667
E = 599,994
Therefore if the D increased by 200,000 the new D/E will be (400,160 + 200,000)/599,994 = 1 which is 100%.
I have worked this in a very complicated and I am sure there is easier way to get to the answer.
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Chaya Khannukar
Portland OR
United States
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Original Message:
Sent: 09-16-2017 02:27 PM
From: Srikanth Ganesh Babu
Subject: Doubt
ABC Company has $1 million in assets and a debt-to-equity ratio of 66 2/3%. If ABC purchases an asset worth $200,000 with debt, its new debt-to-equity ratio will be:
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Srikanth Ganesh Babu
GURGAON
India
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