During 2015, The Mann Corporation borrowed $500,000 from The Biltmore National B
ID: 2437712 • Letter: D
Question
During 2015, The Mann Corporation borrowed $500,000 from The Biltmore National Bank. The loan agreement included a debt covenant restricting the company’s level of debt relative to shareholders’ equity. The covenant specified that Mann’s long-term debt to shareholders’ equity ratio could not exceed 1-to-1 at any time during the loan period. The Mann Corporation’s 2015 year-end balance sheet appeared as follows:
Calculate The Mann Corporation’s long-term debt to shareholders’ equity ratio at year-end 2015.
Round answer to two decimal places. Answer
What is the company’s maximum borrowing capability at year-end 2015 without violating the long-term debt to shareholders’ equity covenant of the existing loan agreement? $Answer
What is the maximum dividend that the company can pay at year-end without violating the debt covenant? $Answer
If the company pays a cash dividend of $100,000 at year-end 2015, what is the company’s maximum borrowing capability without violating the debt covenant? $Answer
Explanation / Answer
Long term debt to equity ratio
Long term Debts
/
Shareholder's Equity
Ratio
Year 2015
$ 625,500.00
/
$ 834,000.00
0.75
Maximum amount than can be borrowed
An amount that equals Long term to shareholder’s equity ratio to 1:1 is the maximum amount of borrowing.
Maximum loan that can be borrowed
$ 834,000.00
Loan already taken
$ 625,500.00
Loan that can be taken without violating Debt Covenant
$ 208,500.00
Payment of dividend will reduce the balance of Shareholder's equity so the maximum amount of dividend would be as such which makes long term debt equity ratio to 1:1
Shareholder's equity balance
$ 834,000.00
Long term loan
$ 625,500.00
Maximum amount of Dividend
$ 208,500.00
Long term Debt
Equity
Current balances
$ 625,500.00
$ 834,000.00
Cash Dividend
$ (100,000.00)
Balance after Dividend
$ 625,500.00
$ 734,000.00
Maximum loan that can be borrowed
$ 734,000.00
Loan already taken
$ 625,500.00
Loan that can be taken without violating Debt Covenant
$ 108,500.00
Long term debt to equity ratio
Long term Debts
/
Shareholder's Equity
Ratio
Year 2015
$ 625,500.00
/
$ 834,000.00
0.75
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