Last year, Arbor Corporation reported the following: This year, Arbor is conside
ID: 2562273 • Letter: L
Question
Last year, Arbor Corporation reported the following:
This year, Arbor is considering whether to issue more debt to fund a $100,000 project or to issue additional shares of common stock. Both options will bring in exactly $100,000. Arbor's current debt contracts contain a debt covenant that requires it to maintain a debt-to-equity ratio of 2.00 or less.
Required:
1. Calculate Arbor's current debt-to-equity ratio. (Round your answer to 2 decimal places.)
2. Calculate Arbor's debt-to-equity ratio assuming it funds the project using additional debt. (Round your answer to 2 decimal places.)
3. Calculate Arbor's debt-to-equity ratio assuming it funds the project by issuing common stock. (Round your answer to 2 decimal places.)
Balance Sheet Total Assets $ 1,160,000 Total Liabilities 740,000 Total Shareholders' Equity $ 420,000This year, Arbor is considering whether to issue more debt to fund a $100,000 project or to issue additional shares of common stock. Both options will bring in exactly $100,000. Arbor's current debt contracts contain a debt covenant that requires it to maintain a debt-to-equity ratio of 2.00 or less.
Required:
1. Calculate Arbor's current debt-to-equity ratio. (Round your answer to 2 decimal places.)
2. Calculate Arbor's debt-to-equity ratio assuming it funds the project using additional debt. (Round your answer to 2 decimal places.)
3. Calculate Arbor's debt-to-equity ratio assuming it funds the project by issuing common stock. (Round your answer to 2 decimal places.)
Explanation / Answer
1.
Debt to equity ratio = Total liabilities/Total equity = 740,000/420,000 = 1.76
2.
Debt to equity ratio = Total liabilities/Total equity = (740,000+100,000)/420,000 = 2
3.
Debt to equity ratio = Total liabilities/Total equity = 740,000/(420,000+100,000) = 1.42
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