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

$121,668

Total liabilities

$861

Total equity

$120,807

  

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 0.76. As of March 31, 2014, what is the maximum amount that Success Systems could borrow from this bank? (Round your intermediate calculations to the nearest dollar amount.)

     

2.	Assume Success Systems borrows the maximum amount allowed from the bank.
(a)	What percentage of assets would be financed by debt? (Round your answer to 1 decimal place.)

     

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

     

Answer 1

1.Maximum amount that can be borrowed from bank.=$90,952.

working:

maximum debt to equity ratio = 0.76.

=> maximum allowed total debt = total equity * 0.76

=>$120,807 * 0.76

=>$91,813.32.

maximum amount to be borrowed = maximum allowed total debt - existing total liability

=>$91,813.32 - 861

=>$90,952........(rounded to nearest dollar)

2.a. percentage of assets financed by debt

=> total debt / total assets * 100

total debt = new debt + existing debt =>90,952 +861

=>$91,813

total assets = 121,668 + 90,952 borrowed

=>212,620

Now

percentage of assets finaced by debt = 91,813 / 212,620 *100

=>43.18%.

.2b.percentage of assets financed by equity = total equity / total assets * 100

=>120,807 / 212,620 *100

=>56.82%