Adria Lopez has consulted with her local banker and is considering financing an
ID: 2461536 • Letter: A
Question
Adria Lopez has consulted with her local banker and is considering financing an expansion of her business by obtaining a long-term bank loan. Selected account balances at March 31, 2014, for Success Systems follow.
Total assets $129,909 Total liabilities $875 Total equity $129,034
1.) The bank has offered a long-term secured note to Success Systems. The bank’s loan procedures require that a client’s debt-to-equity ratio not exceed 0.8. As of March 31, 2014, what is the maximum amount that Success Systems could borrow from this bank? (Round your intermediate calculations to the nearest dollar amount.)
Maximum Amount: $__________
2.) Assume Success Systems borrows the maximum amount allowed from the bank.
(a)
What percentage of assets would be financed by debt? (Round your answer to 1 decimal place.)
Percentage of Assets Financed By Debt: ____________%
(b)
What percentage of assets would be financed by equity? (Round your answer to 1 decimal place.)
Percentage of Assets Financed By Equity: ____________%
Explanation / Answer
1)
Target Debt to Equity = 0.8
(Present Total Liability + Maximum Amount can be borrowed)/Equity = 0.8
(875+Maximum Amount can be borrowed)/129034 = 0.8
Maximum Amount can be borrowed = 129034*0.8 - 875
Maximum Amount can be borrowed = $ 102352
2)
a)
Percentage of Assets Financed By Debt = Total Liability after financed /Total Asset after financed
Percentage of Assets Financed By Debt = (875+102352)/(129909+102352)
Percentage of Assets Financed By Debt = 44.4%
b)
Percentage of Assets Financed By Equity = Total Equity after financed /Total Asset after financed
Percentage of Assets Financed By Equity = 129034/(129909+102352)
Percentage of Assets Financed By Equity = 55.6%
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