Santana Rey has consulted with her local banker and Is considering financing an

Question

Santana Rey has consulted with her local banker and Is considering financing an expansion of her business by obtalning a long-term bank loan. Selected account balances at March 31, 2018, for Buslness Solutions follow. $120,268 Total liabilitie $875 Total equity Required: 1. The bank has offered a long-term secured note to Business Solutions. The bank's loan procedures require that a client's debt-to- equity ratio not exceed 0.8. As of March 31, 2018, what is the maximum amount that Buslness Solutions could borrow from thls bank? Round your Intermedlate calculations to the nearest dollar amount.) aximum amount 2. Assume Business Solutions borrows the maximum amount allowed from the bank. (a) What percentage of assets would be financed by debt? (Round your Intermediate dollar values to the nearest whole number and final answer to 1 declmal place.) ge of assets financed by debt (b) What percentage of assets would be financed by equity? (Round your Intermedlate doller values to the nearest whole number and final answer to 1 declmal place.) Percentage of assets financed by equity

Explanation / Answer

1. The maximum debt the company can have is 0.8 or 80% of equity (this is what is meant by 'can't have a greater debt to equity ratio than 0.8). $119393 x 0.8 = $95514.40
As the company has already got $875 of liabilities, we must subtract this amount from the total debt the company can have to get the amount the company may borrow. $95514.40 - $875 = $94639.40

2. To find the percentage these make of assets, we must figure out what total assets now are. Remember that A = L + P and the accounting equation must always balance. So if you borrow $94639.40 (liability), you get $94639.40 cash (asset). So total assets is now $120268 + $94639.40 = $214907.40
(a) To get the percentage of assets financed by liabilities, simply divided liabilities by assets and multiply by 100.
Total liabilities equals $95514.40 (the total debt the company could have calculated in 1.)
Total liabilities divided by total assets times 100 = $95514.40/$214907.40 x 100
=44.44%
(b) The total equity remains the same and the percentage can be calculated in the same way as above, substituting equity for assets. Or for a quicker answer, since A = L + P, the two percentages must equal 100%. So simply subtract 44.44 from 100, leaving 55.56%.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

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