A New Firm Is Developing Its Business Plan

question 39

Multiple Choice

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? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)

• A) 47.33%
• B) 49.82%
• C) 52.45%
• D) 55.21%
• E) 58.11%

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Definitions:

Corrective Action

Measures taken to identify, eliminate, and prevent recurrence of defects or problems in a product, process, or system.

Variance Analysis

A technique used to identify and explain the reasons for differences between budgeted and actual financial performance.

Standard Costs

Predetermined costs assigned to goods and services, used as target prices to measure performance.

Actual Costs

The genuine costs incurred in the production of goods or services, including all direct labor, materials, and overhead expenses.