A New Firm Is Developing Its Business Plan

question 124

Multiple Choice

A new firm is developing its business plan.It will require $715,000 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) 39.86%
• B) 51.38%
• C) 44.29%
• D) 34.10%
• E) 38.53%

---

Definitions:

Indohyus

An extinct genus of even-toed ungulate that lived about 48 to 41 million years ago, believed to be an early relative of whales.

Pakicetus

An extinct genus of early whales living in the Eocene epoch, illustrating a significant stage in the transition from land to sea creatures.

Modern-day Whales

Current species of whales that descended from land-dwelling ancestors through a series of evolutionary transitions over millions of years.

Hippopotamus

A large, mostly herbivorous mammal native to sub-Saharan Africa, known for its large size, semi-aquatic habits, and aggressive nature.