Thank you,Sharon Cubicle Company is in need of another factory building. The bui

Question

Thank you,Sharon

Cubicle Company is in need of another factory building. The building will cost $500,000. Cubicle is considering the following possible financing alternatives to acquire the building. Lease the building under an operating lease. Issue common stock in the amount of $500,000. Negotiate a long-term bank loan for $500,000. Negotiate a long-term bank loan for $350,000 and increase short-term borrowing by $150,000. Currently, Cubicle has current assets of $600,000, noncurrent assets of $975,000, current liabilities of $280,000, and noncurrent liabilities of $410,000. Under existing loan covenants, Cubicle must maintain a current ratio of 2.0 or more and a debt-to-equity ratio of less than 0.80. Compute the current ratio and debt-to-equity ratio for each alternative. If required, round your answers to two decimal places. Which, if any, of the financing alternatives will allow Cubicle to avoid violating the loan covenants?

Explanation / Answer

Alternative C)Debt equity ratio :

Total debt = 280000+410000 + 500000 = 1190000

Total equity = 885000

Ratio = 1190000/885000

        = 1.34

Alternative D:

Current ratio :

current asset = 600000

current liabilities = 280000+150000= 430000

Ratio = 600000 / 430000

           = 1.40 : 1

Debt equity ratio =

Debt = 280000 + 410000 + 350000+150000 = $ 1190000

equity = 885000

Ratio = 1190000/885000

           = 1.34

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