On December 31, 2015, Sveva Inc. has total liabilities of $112,000 and total equ
ID: 2414760 • Letter: O
Question
On December 31, 2015, Sveva Inc. has total liabilities of $112,000 and total equity of $220,000. The company needs to raise additional funds through debt and equity. The company will issue 25,000 shares of common stock at $11.10 per share and in addition it intends to borrow as much as it can from Bank of Switzerville. Bank of Switzerville requires a maximum debt-to-asset ratio of 0.6. What is the maximum additional amount that Sveva can borrow after the additional stock is issued? Select one: a. $253,700 b. $332,330 c. $466,250 d. $634,250
Explanation / Answer
Answers
Total Liabilities
Total Equities
Total Assets
Balance given
$ 1,12,000.00
$ 2,20,000.00
$ 3,32,000.00
Issue of stock
$ 2,77,500.00
$ 2,77,500.00
Total before borrowing
$ 1,12,000.00
$ 4,97,500.00
$ 6,09,500.00
Total Debt after borrowing = $ 112,000 + x
Total Assets after borrowings = $ 609,500 + x
(112000 + x)/(609500 + x) = 0.6
112000 + x = 0.6 (609500 + x)
112000 + x = 365700 + 0.6x
x - 0.6x = 365700 - 112000
0.4x = 253700
x = 634250
Total Liabilities
Total Equities
Total Assets
Balance given
$ 1,12,000.00
$ 2,20,000.00
$ 3,32,000.00
Issue of stock
$ 2,77,500.00
$ 2,77,500.00
Total before borrowing
$ 1,12,000.00
$ 4,97,500.00
$ 6,09,500.00
Amount borrowed
$ 6,34,250.00
$ 6,34,250.00
Total after borrowing
$ 7,46,250.00
$ 4,97,500.00
$ 12,43,750.00
Total Debt
/
Total Assets
=
Debt to Asset ratio
$ 7,46,250.00
/
$ 12,43,750.00
=
0.60
Total Liabilities
Total Equities
Total Assets
Balance given
$ 1,12,000.00
$ 2,20,000.00
$ 3,32,000.00
Issue of stock
$ 2,77,500.00
$ 2,77,500.00
Total before borrowing
$ 1,12,000.00
$ 4,97,500.00
$ 6,09,500.00
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