A New Firm Is Developing Its Business Plan

question 83

Multiple Choice

A new firm is developing its business plan. It will require $615,000 of assets, and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably 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 ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)

• A) 41.94%
• B) 44.15%
• C) 46.47%
• D) 48.92%
• E) 51.49%

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Definitions:

Cannon-Bard Theory

A theory of emotion that suggests emotions and bodily responses occur simultaneously, rather than one causing the other.

Emotional Response

An individual's psychological reaction to an external stimulus, which can involve feelings, behaviors, and physiological changes.

Physiological Changes

Alterations in the body's normal biological functions which can occur due to various factors such as stress, aging, or illness.

Physiological Changes

Alterations in the body's normal biological functions, which can occur due to factors like stress, emotional states, and environmental changes.