A New Firm Is Developing Its Business Plan

question 69

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:

Foreign Policy

A government's strategy in dealing with other nations.

Liberties

The condition of experiencing freedom in society from overbearing limitations set by authorities on one's lifestyle, actions, or political opinions.

Anticommunist Crusade

A period of intense effort to eliminate communist influence in various spheres of life, often associated with the Cold War era.

American Loyalty

The sense of allegiance or fidelity to the United States, often highlighted during times of national crises or wars.