Question
In: Accounting
On December 31, 2015, Sveva Inc. has total liabilities of $112,000 and total equity of $220,000....
On December 31, 2015, Sveva Inc. has total liabilities of $112,000 and total equity of $220,000. The company needs to raise additional funds through debt and equity. The company will issue 25,000 shares of common stock at $11.10 per share and in addition it intends to borrow as much as it can from Bank of Switzerville. Bank of Switzerville requires a maximum debt-to-asset ratio of 0.6. What is the maximum additional amount that Sveva can borrow after the additional stock is issued? Select one: a. $253,700 b. $332,330 c. $466,250 d. $634,250
Solutions
Expert Solution
- All working forms part of the answer
- Liabilities + Equities = Assets.
- Working:
|
Total Liabilities |
Total Equities |
Total Assets |
|
|
Balance given |
$ 1,12,000.00 |
$ 2,20,000.00 |
$ 3,32,000.00 |
|
Issue of stock |
$ 2,77,500.00 |
$ 2,77,500.00 |
|
|
Total before borrowing |
$ 1,12,000.00 |
$ 4,97,500.00 |
$ 6,09,500.00 |
- Total Debt to Asset Ratio = Total Debt (Liabilities) / Total Assets
- Total Debt Asset ratio required after borrowing = 0.6
- Let the amount to be borrowed be ‘x’, then
Total Debt after borrowing = $ 112,000
+ x
Total Assets after borrowings = $ 609,500 + x
- Ratio = (112,000 + x) / (609500 + x) = 0.6
|
(112000 + x)/(609500 + x) = 0.6 |
|
112000 + x = 0.6 (609500 + x) |
|
112000 + x = 365700 + 0.6x |
|
x - 0.6x = 365700 - 112000 |
|
0.4x = 253700 |
|
x = 634250 |
- Hence amount to be borrowed = $ 634,250 to make Debt to Asset ratio 0.60 = Option D
- Proof:
|
Total Liabilities |
Total Equities |
Total Assets |
||
|
Balance given |
$ 1,12,000.00 |
$ 2,20,000.00 |
$ 3,32,000.00 |
|
|
Issue of stock |
$ 2,77,500.00 |
$ 2,77,500.00 |
||
|
Total before borrowing |
$ 1,12,000.00 |
$ 4,97,500.00 |
$ 6,09,500.00 |
|
|
Amount borrowed |
$ 6,34,250.00 |
$ 6,34,250.00 |
||
|
Total after borrowing |
$ 7,46,250.00 |
$ 4,97,500.00 |
$ 12,43,750.00 |
|
|
Total Debt |
/ |
Total Assets |
= |
Debt to Asset ratio |
|
$ 7,46,250.00 |
/ |
$ 12,43,750.00 |
= |
0.60 |
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