A New Firm Is Developing Its Business Plan

question 63

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 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)49.82%
• B)52.45%
• C)55.21%
• D)58.11%

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Definitions:

Gross Private Domestic Investment

The total capital investment in an economy by private sector entities, excluding government spending.

Durable Goods

Goods not for immediate consumption that can be used over a period of time, such as appliances, cars, and furniture.

Business Inventories

The stocks of goods and materials that firms hold for the purpose of sale or input into production, often used to meet consumer demand or continue production.

Welfare Benefits

Financial assistance provided by the government to individuals or groups in need, aiming to support well-being and economic stability.