Question

1. Hutchinson Corporation has zero debt - it is financed only with common equity. Its total assets are $405,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

            a. $161,973.40            

            b. $162,000.00            

            c. $161,986.70            

            d. $162,013.30            

            e. $162,026.60

2. Orono Corp.'s sales last year were $565,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times interest earned (TIE) ratio?

            a. 16.20           

            b. 18.90           

            c. 18.00           

            d. 17.10           

            e. 19.80

3. Bostian, Inc. has total assets of $670,000. Its total debt outstanding is $185,000. The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?

            a. $183,500    

            b. $183,556    

            c. $183,444    

            d. $183,389    

            e. $183,611

4. Ziebart Corp.'s EBITDA last year was $435,000 ( = EBIT + depreciation + amortization), its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term lease. The firm had no amortization charges. What was the EBITDA coverage ratio?

            a. 8.91

            b. 7.83             

            c. 8.55

            d. 8.19             

            e. 7.47

Answer 1

Ques-1)

Total Assets = $405,000

Debt/Assets ratio = 40%

0.40 = Debt/$405,000

Debt = $162,000

Hence, Option B

Ques-2)

EBIT = Sales - Operating Costs

= $ 565,000 - $ 362,500

= $ 202,500

- Times Interest Earned (TIE) ratio = EBIT/Interest

=$202,500/$12,500

= 16.2 times

Hence, Option A

Ques-3)

Total Assets = $670,000

Total debt outstanding = $185,000

Debt/Assets ratio = 55%

0.55 = Debt/$670,000

Total Debt = $368,500

Debt that must be added or subtracted to achieve the target debt ratio = Total Debt - Total debt outstanding

= $368,500 - $185,000

= $183,500

Hence, Option A

Ques-4)

EBITDA coverage ratio= (EBITDA + Lease Payments)/(Interest Expenses + Principal payments + Lease Payments)

= ($435,000 + $17,400)/($9500 + $26,000 + $17,400)

= $452,400/52,900

= 8.55 times

HEnce, option C

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