Accounts payable $543,000
Notes Payable $247,000
current liabilities $790,000
Long term debt $1,238,000
common equity $5,141,000
Total liabilities and equity $7,169,000
A. What percentage of the firm's assets does the firm finance using debt (liabilities)?
B. If Campbell were to purchase a new warehouse for $1.1 million and finance it entirely with long-term debt, what would be the firm's new debt ratio?
A)
Total Liabilities = Current Liabilities + Long Term Debt
= $790,000 + $1,238,000
= $2,028,000
Total Assets = Total Liabilities + Total Equity
= $2,028,000 + $5,141,000
= $7,169,000
Debt to Asset Ratio = Total Liabilities / Total Assets
= $2,028,000 / $7,169,000
= 0.2829 or 28.29%
B)
If Campbell purchased a new warehouse for $1.1 million, both Long Term Debt and Total Liabilities will increase by $1.1 million
Total Liabilities = Current Liabilities + Long Term Debt
= $790,000 + ($1,238,000 + $1,100,000)
= $3,128,000
Total Assets = Total Liabilities + Total Equity
= $3,128,000 + $5,141,000
= $8,269,000
(Total Assets will increase as the company purchases warehouse which adds to the balance of Total Assets)
Debt to Asset Ratio = Total Liabilities / Total Assets
= $3,128,000 / $8,269,000
= 0.3783 or 37.83%
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