Jake Company Borrowed $100,000 from Guaranty Trust Bank to Finance

question 38

Multiple Choice

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.
If Jake invests the entire $100,000 of the borrowed funds in equipment, what would be its current ratio?

• A)3.24
• B)1.76
• C)1.31
• D)1.50

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Definitions:

Dividend

A payment made by a corporation to its shareholders, usually derived from the company’s profits.

Preferred Stock

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, usually with dividends that are paid out before those of common shareholders.

Common Stock

Shares representing ownership in a corporation, giving holders voting rights and a claim on a portion of the company’s profits through dividends.

Dividend

a distribution of a portion of a company's earnings to its shareholders, usually in cash or additional shares.