Help answer this question please LOI4-3, through LO14-5 You are a loan officer w
ID: 2572272 • Letter: H
Question
Help answer this question please
LOI4-3, through LO14-5 You are a loan officer with Third Nebraska Bank. Joe West owns two successful restaurants, eaclh CASE 14.2 Evaluating Debt-Paying Ability of which has applied to your bank for a S250,000 one-year loan for the purpose of opening a sec- ond location. Condensed balance sheets for the two business entities are shown below. NEBRASKA STEAK RANCH BALANCE SHEET DECEMBER 31, 2015 Assets Liabilities & Stockholders' Equity Current liabilities . 00,000 onerm liabilities Total liabilities & stockholders' equity. $375,000 $375,000Explanation / Answer
Debt Paying Ability - The company has good debt paying ability
Debt Ratio = Total Liabilities / Total Assets = 230000 / 375000 = 0.613
Company has debt ration below 1 which means the company has more assets than the debt it owes.
Debt to Equity Ratio = Total Liabilities / Stockholders Equity = 230000 / 145000 = 1.59
A high debt to equity ratio can mean two different things: If a company also has a low times interest earned, then it was probably a bit too reliant on funding operations with debt and will have a hard time paying its interest. If the company also has a very high times interest earned, then it was likely incurring debt to generate funding beyond what it could earn selling debt to generate sales
Equity Multiplier = Total Assets / Stockholders Equity = 375000 / 145000 = 2.59
This measures the ratio of company's assets that stockholders own.Ratio of 1 means company's assets are funded thru equity and less than 1 means that the company uses debt to fund its activities.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.