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Exceed Client
Exceed Client
Accounting 2 Problem…help solve?
Adriana Lopez has consulted with her local banker and is considering financing an expansion of her business by obtaining a long-term bank loan. Slected account balances at March 31, 2008, for Success Systems follow.
total assets…147,529 total liabilites…1,050 total equity…146,479
1. The bank has offered a long-term secured note to Success Systems. The bank’s loan procedures require that a client’s debt-to-equity ratio not exceed 0.8. As of March 31,2008, what is the maximum amount that Success Systems could borrow from this bank?
2. If Success Systems borrows the maximum amount allowed from the bank, what percentage of assets would be financed (a) by debt, and (b) by equity?
3. What are some factors Lopez should consider before borrowing the funds?
If you can help me answer this, 10 points no doubt. Also if you think you can help me with more problems like this send me an email to missmozee@yahoo.com. Thanks in advance!
1. To answer the first question, you simply need to find the maximum debt the company can have and subtract from this the debt (liabilities) the company already has.
Answer (step-by-step)
The maximum debt the company can have is 0.8 or 80% of equity (this is what is meant by ‘can’t have a greater debt to equity ratio than 0.8). $146,479 * 0.8 = $117,183.2
As the company has already got $1,050 of liabilities, we must subtract this amount from the total debt the company can have to get the amount the company may borrow. $117,183.20 – $1,050 = $ 116,133.20
2. To find the percentage these make of assets, we must figure out what total assets now are. Remember that A = L + P and the accounting equation must always balance. So if you borrow $116,133.20 (liability), you get $116,133.20 cash (asset). So total assets is now $147,529+$116,133.20 = $263,622.2
(a) To get the percentage of assets financed by liabilities, simply divided liabilities by assets and multiply by 100.
Total liabilities equals $117,183.20 (the total debt the company could have calculated in 1.)
Total liabilities divided by total assets times 100 = $177,183.20/$263,622.20*100
=44.05%
(b) The total equity remains the same and the percentage can be calculated in the same way as above, substituting equity for assets. Or for a quicker answer, since A = L + P, the two percentages must equal 100%. So simply subtract 44.05 from 100, leaving 55.95%
3. The answers here are common sense. Things like interest rates, ability to make repayments, impact on shareholders (such as decreased dividends)
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