Question

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 1

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%