An All-Equity New Firm Is Developing Its Business Plan

question 86

Multiple Choice

An all-equity new firm is developing its business plan. It will require $615,000 of assets (which equals common equity) , 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 4.0The firm will use debt and common equity for financing. What is the maximum debt to capital ratio (measured as debt/total common equity) 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.)

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

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Definitions:

Participation Error

Mistakes or difficulties that arise in the context of individuals engaging with or contributing to a group activity or decision-making process.

Programmed Decisions

Decisions that are routine and repetitive, often automated or made following established guidelines or procedures.

Moral Problem

Poses major ethical consequences for the decision maker or others.

Ethically Uncomfortable Alternatives

Choices or options that present moral dilemmas or discomfort due to potential harm or ethical issues.