A New Firm Is Developing Its Business Plan

question 89

Multiple Choice

A new firm is developing its business plan.It will require $735,000 of assets (which equals total invested capital) ,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.The firm will use only debt and common equity for financing.What is the maximum debt to capital ratio (measured as debt/total invested capital) the firm can use? (Hint: Find the maximum dollars of interest,then the debt that produces that interest,and then the related debt to capital ratio. ) Do not round your intermediate calculations.

• A) 46.53%
• B) 38.78%
• C) 43.08%
• D) 34.90%
• E) 53.85%

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Definitions:

Stratified

Layered or arranged in layers, often referring to the structure of tissues in biology or the arrangement of sedimentary rocks in geology.

Abyssal

Refers to the deepest parts of the ocean, typically areas below 2,000 meters, characterized by very low temperatures, high pressures, and complete darkness.

Bathypelagic

Referring to the deep-sea zone, lying between about 1000 to 4000 meters below the ocean's surface, characterized by complete darkness.

Epipelagic

The uppermost layer of the ocean, extending from the surface down to about 200 meters, where sunlight is plentiful, supporting a diverse range of life.