Question

Company ABC has total liabilities of $660,000 and total equity of $342,000. The company needs to raise additional funds through debt and equity. The company will issue 12,000 shares of common stock at $15 per share and in addition it intends to borrow as much as it can from Bank of XYZ. Bank of XYZ requires a maximum debt-to-asset ratio of 0.64. What is the maximum additional amount that Company ABC can borrow after the additional stock is issued?

Answer 1

Answer: $268,000

Explanation:

GIVEN the following ;

TOTAL LIABILITIES = $660,000

TOTAL EQUITY = $342,000

IN ADDITION:

SHARES TO BE ISSUED = 12,000

PRICE PER SHARE = $15

MAXIMUM LIABILITY ABC CAN BORROW =?

MAXIMUM DEBT-TO-ASSET RATIO = 0.64

TOTAL AMOUNT RAISED FROM BOTH EQUITY AND LIABILITY:

$(660,000 + 342,000 + (12,000 × $15))

$(660,000+342,000+180,000) = $1,182,000

THEREFORE, MAXIMUM LIABILITY WHICH COULD BE ADDED SUCH THAT MAXIMUM-DEBT-ASSET RATIO WILL NOT EXCEED 0.64 CAN BE CALCULATED THUS:

LET MAXIMUM ADDITIONAL LIABILITY = Y

MAXIMUM-DEBT-ASSET RATIO = TOTAL LIABILITY / (TOTAL EQUITY + TOTAL LIABILITY)

0.64 = ($660,000 + Y) / ($1,182,000 + Y)

0.64×($1,182,000+Y) = $660,000 +Y

$756,480 + 0.64Y = $660,000 + Y

0.64Y- Y = $(660,000 - 756,480)

-0.36Y = - $96,480

Y = $268,000

Company ABC Can borrow a maximum of $268,000

Answer 2

Answer:

the company can borrow maximum of $268,000

Explanation:

Given:

total liabilities = $660,000

total equity = $342,000

Total Cost of shares = 12,000 shares × $15 = $180,000

Total asset before loan = total liabilities + total equity + Cost of shares

=$660,000 + $342,000 + 180,000

= $1,182,000

Let x represent the maximum amount that the company can borrow =

(Total liabilities + x) ÷ ( Total asset before loan + x) = debt-to-asset ratio

Where debt-to-asset ratio = 0.64

So ($660,000+ x) / ($1,182,000 + x) = 0.64

Cross multiply

$660,000+ x = 0.64 ($1,182,000 + x)

$660,000+ x = 756,480 + 0.64x

x - 0.64x = $756,480 - $660,000

0.36x = $96,480

x = $268,000

the company can borrow maximum of $268,000