Question

Last year, Arbor Corporation reported the following: Balance Sheet Total Assets $ 1,280,000; Total Liabilities 820,000; Total Shareholders' Equity $ 460,000

This year, Arbor is considering whether to issue more debt to fund a $100,000 project or to issue additional shares of common stock. Both options will bring in exactly $100,000. Arbor's current debt contracts contain a debt covenant that requires it to maintain a debt-to-equity ratio of 2.00 or less. Calculate Arbor's current debt-to-equity ratio

Answer 1

Arbor Corporation has a current debt-to-equity ratio of 1.78, which is determined by dividing its total liabilities of $820,000 by its total shareholders' equity of $460,000. This ratio is below the debt covenant threshold of 2.00.

Step-by-step explanation:

To calculate Arbor Corporation's current debt-to-equity ratio, we compare the company's total liabilities to its total shareholders' equity. According to the information given, Arbor has Total Liabilities of $820,000 and Total Shareholders' Equity of $460,000.

The debt-to-equity ratio is calculated by dividing Total Liabilities by Total Shareholders' Equity.

Debt-to-Equity Ratio = Total Liabilities / Total Shareholders' Equity

Debt-to-Equity Ratio = $820,000 / $460,000

Debt-to-Equity Ratio = 1.78

Therefore, Arbor Corporation's current debt-to-equity ratio is 1.78, which is below the required 2.00 threshold set by its debt covenants. This means that the company is currently in compliance with its debt covenants and has the ability to take on additional debt without violating this particular covenant.