The liabilities and owners' equity for Campbell Industries is found here:
Accounts payable $521,000
Notes payable $254,000
Current liabilities $775,000
Long-term debt $1,224,000
Common equity $5,002,000
Total liabilities and equity $7,001,000
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. What percentage of the firm's assets does the firm finance using debt (liabilities)? The fraction of the firm's assets that the firm finances using debt is ____%. (Round to one decimal place.)
Answer : (a.) Calculation of Firm's Assets that is financed using Debt (Liabilities)
Total Assets = Total Liabilities and Equity
Therefore Total Assets = 7,001,000
Debt = Current liability + Long Term Debt
= 775,000 + 1,224,000
= 1,999,000
Firm's Assets that is financed using Debt (Liabilities) = 1,999,000 / 7,001,000
= 0.2855 or 28.6%
(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
Debt Ratio = (Current Liability + Long Term debt) / Total Assets
If Campbell purchases new warehouse then Total assets as well as Long Term debt will increase by 1.1 million or 1,100,000
Revised Total Assets = 7,001,000 + 1,100,000
= 8,101,000
Revised Long Term Debt = 1,224,000 + 1,100,000
= 2,324,000
Debt Ratio = (775,000 + 2,324,000) / 8,101,000
= 3,099,000 / 8,101,000
= 0.3825 or 38.25%
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