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A new firm is developing its business plan. It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year. Management is quite sure of these numbers
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37 votes
37 votes
A new firm is developing its business plan. It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year. Management is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt-to-assets ratio the firm can use

User Sloriot
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10 votes
10 votes

Answer:

58.11%

Step-by-step explanation:

Sales = $452,800

Operating costs= 354,300

Operating Income (EBIT) = $98,500

TIE= 4.00

Maximum interest expense= EBIT/TIE= $24,625

Interest rate= 7.50%

Max. debt =Max interest/Interest rate = $328,333

Maximum debt ratio=Debt/ Assets= 58.11%

User CAFEBABE
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