A New Firm Is Developing Its Business Plan

question 53

Multiple Choice

A new firm is developing its business plan.It will require $710,000 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) 54.86%
• B) 46.83%
• C) 44.60%
• D) 43.26%
• E) 38.80%

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Definitions:

Lumber

Timber that has been processed into beams and planks, a stage in the process of wood production.

Before Trade

Refers to the economic conditions and market structures that exist in a country or region prior to engaging in international trade.

Consumption

Consumption is the action or process of using goods and services to satisfy needs or wants, representing a primary concept in economics related to consumer behavior.

Absolute Advantage

Situation in which Country 1 has an advantage over Country 2 in producing a good because the cost of producing the good in 1 is lower than the cost of producing it in 2.