Question

Montclair Company is considering a project that will require a $610,000 loan. It presently has total liabilities of $165,000 and total assets of $675,000. 1. Compute Montclair’s (a) current debt-to-equity ratio and (b) the debt-to-equity ratio assuming it borrows $610,000 to fund the project. 2. If Montclair borrows the funds, does its financing structure become more or less risky?

Answer 1

Answer:

32.35%  or 0.33

151.96%   or 1.52

The new borrowing would make the financing structure more risky since the amount of fixed interest payment would increase significantly

Explanation:

Current debt to equity ratio:

Debt to equity=debt amount/equity amount

Current debt  is $165,000

current equity is $675,000

equity =total assets-debt

debt to equity ratio=$165,000/($675,000-$165,000)=32.35%

If the $610,000 is borrowed ,the debt value would increase by $610,000

new debt value=$165,000+$610,000=$ 775,000.00  

New debt to equity ratio= $775,000.00/$510,000.00=151.96%