Question

On December 31, 2017, FFS Inc. has total liabilities of $840,500 and total equity of $1,446,000....

On December 31, 2017, FFS Inc. has total liabilities of $840,500 and total equity of $1,446,000. The company needs to raise additional funds through debt and equity. The company will issue 5,000 shares of common stock at $15 per share and in addition it intends to borrow as much as it can from Bank of Stackwood. Bank of Stackwood requires a maximum debt-to-asset ratio of 0.4.

What is the maximum additional amount that FFS Inc. can borrow after the additional stock is issued?

Select one:

a. $173,500

b. $104,100

c. $123,500

d. $0 (the company already exceeds the 0.4 debt-to-asset ratio)

Homework Answers

Answer #1

Solution:

Total Equity before additional borrowings = $1,446,000 + (5000*$15) = $1,446,000 + $75,000 = $1,521,000

Total Liabilities or Debt before additional borrowings = $840,500

Total Assets before additional borrowing = Total Equity before additional borrowings - Total Liabilities or Debt before additional borrowings = $1,521,000 - $840,500 = $680,500

Now, Debt to asset ratio before additional borrowing = Total Debt / Total Assets = $840,500 / $680,500 = 1.24

Since debt to asset ratio already exceeds maximum debt to asset ratio, therefore if the company borrows more amount then debt to asset ratio will increase.

Hence company cannot borrow any amount as it debt to asset ratio already exceeds maximum 0.4 as required by bank.

Hence option "d" is correct, i.e. "$0 (the company already exceeds the 0.4 debt-to-asset ratio)".

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