Adria Lopez has consulted with her local banker and is considering financing an

Question

Adria Lopez has consulted with her local banker and is considering financing an expansion of her business by obtaining a long-term bank loan. Selected account balances at March 31, 2014, for Success Systems follow. Total assets $121,568 Total liabilities $862 Total equity $120,706

Required: 1. The bank has offered a long-term secured note to Success Systems. The bank’s loan procedures require that a client’s debt-to-equity ratio not exceed 0.77. As of March 31, 2014, what is the maximum amount that Success Systems could borrow from this bank?

Maximum Amount

What percentage of assets would be financed by debt? (Round your answer to 1 decimal place.)

What percentage of assets would be financed by equity? (Round your answer to 1 decimal place.)

Maximum Amount

Explanation / Answer

Answer:

1. According to Banks Policies the Debt to Equity Ratio shall not be more than 0.77; therefore, the Company can borrow maximum (0.77 x $ 120,706) - $ 862 = $ 92081.62.

2 a. Percentage of assets that will be financed by Long Term Debt = ($ 92081.62 + $ 862) x 100 / ($ 121,568 + $ 92081.62) = ($ 92081.62 + $ 862) x 100 / $ 213,649.62 = 43.50%

2b. Percentage of assets financed by equity = 100 - 43.50 = 56.50%

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