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, 2022, for Business Solutions follow. Total assets $120,268, total liabilities $875, total equity $119,393. 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, 2022, what is the maximum amount that Business Solutions could borrow from this bank? (a) What percentage of assets would be financed by debt? (b) What percentage of assets would be financed by equity?

Answer 1

The maximum amount that Business Solutions could borrow from the bank is $94,692.90. The percentage of assets that would be financed by debt is 0.727%, and the percentage of assets that would be financed by equity is 99.270%.

Step-by-step explanation:

To determine the maximum amount that Business Solutions could borrow from the bank, we need to calculate the debt-to-equity ratio. The debt-to-equity ratio is calculated by dividing total liabilities by total equity. In this case, the ratio is 875/119,393 = 0.0073. Since the bank's loan procedures require that the debt-to-equity ratio not exceed 0.8, we can set up the following equation:

0.0073 + x = 0.8

Solving for x, we find that x = 0.8 - 0.0073 = 0.7927. This means that the maximum amount Business Solutions could borrow is 0.7927 times the total equity. Therefore, the maximum amount is 0.7927 * 119,393 = $94,692.90.

To calculate the percentage of assets financed by debt, we divide the total liabilities by the total assets and multiply by 100. In this case, the percentage is (875/120,268) * 100 = 0.727%. To calculate the percentage of assets financed by equity, we divide the total equity by the total assets and multiply by 100. In this case, the percentage is (119,393/120,268) * 100 = 99.270%.