Question

Question Santana Rey has consulted with her local banker and is considering financing an expansion of her business by obtaining a long-term bank loan. Selected account balances at March 31, 2018, for Business Solutions follow.

Total assets . $120,268 Total liabilities . $875 Total equity $119,393

Required

1. The bank has offered a long-term secured note to Business Solutions. The bank’s loan procedures require that a client’s debt-to-equity ratio not exceed 0.8. As of March 31, 2018, what is the maximum amount that Business Solutions could borrow from this bank (rounded to the nearest dollar)?

2. If Business Solutions borrows the maximum amount allowed from the bank, what percentage of assets would be financed (a) by debt and (b) by equity?

3. What are some factors Santana Rey should consider before borrowing the funds?

Answer 1

Step 1

The debt-to-equity ratio is a ratio used to define the relationship between debt and the company's equity. The debt-to-equity ratio that the ability of the company to pay its debts by using equity.

Step 2: Maximum amount borrow

As of March 31, 2018, the maximum amount that Business Solutions could borrow from this bank

Step 4: Factors considered by Santana Rey

The other factors that Santana Rey considers are the loan’s interest rate, the period of the loan, and the time’s interest ratio of the company.

1.    The amount of the loan borrowed by Santana Rey is $94,639.40

2.    Assets financed by debt is 44.44% and the assets financed by equity is 55.55%.

3.    The other factors are interest rate and times interest earned ratio.