Caruthers Inc. is a small manufacturing firm and has the following summarized ba

Question

Caruthers Inc. is a small manufacturing firm and has the following summarized balance sheet. Current assets $20 fixed assets $130 total assets $150 current liabilities $15 long term debt $65 equity $70. Total liabilities and equity $150. The firm is interested in acquiring a fleet of 10 company cars for its staff, The cars have an economic life of 7 years, but Caruthers plans to keep them for only three because it doesn't want its salespeople driving around in old cars. The cars are $20.000 each and Caruthers is considering borrowing to purchase them. A. Restate Caruthers

Explanation / Answer

Caruthers Inc.Balance Sheet

Current assest

20

Current liabilities

15

Fixed assets

330

Long term debt

265

total

350

equity

70

Total debt and equity

350

=====================

Before loan

=debit ratio = (Current liabilities + Long term debt)/ total assests

=(15+65) / 150 =53.5%

========================

After loan

=debit ratio = (Current liabilities + Long term debt)/ total assests

=(15+265) / 350 =80%

================
If the firm borrows this much money, its debt ratio will deteriorate to a dangerous level. 80% debt isvery high for a non-financial company.

Equity investors will be concerned and may bid its stock downif it is traded. Lenders will probably be unwilling to lend more for any reason

===========

Caruthers may be able to lease the cars over three years, treat the lease as an operating lease, andavoid putting anything on its balance sheet.

The lease will qualify as operating because its three year term is less that 75% of the cars’ economic life of seven years

Current assest

20

Current liabilities

15

Fixed assets

330

Long term debt

265

total

350

equity

70

Total debt and equity

350

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.