A New Firm Is Developing Its Business Plan

question 63

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 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)49.82%
• B)52.45%
• C)55.21%
• D)58.11%

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Definitions:

Legs

Limbs on animals and humans used primarily for supporting the body and facilitating locomotion or movement.

Motion

The change in position of an object with respect to time and its reference point.

Potential Energy

The energy stored by an object due to its position in a force field or its condition.

Crest

The peak or highest point of something, often used to describe the comb or tuft of feathers on the head of birds or other features like waves or helmets.