At the end of 2020, Montvale Associates borrowed $120,000 from the Bayliner Bank. The debt covenant specified that Montvale’s debt/equity ratio could not exceed 1.5:1 during the period of the loan. A summary of Montvale’s balance sheet after the loan follows. 2020 Assets Current assets $130,000 Long-term assets 350,000 Total assets $480,000 Liabilities and Shareholders’ Equity Current liabilities $130,000 Long-term liabilities 150,000 Shareholders’ equity 200,000 Total liabilities and shareholders’ equity $480,000 Compute Montvale’s debt/equity ratio immediately after the loan. How much additional debt can the company incur without violating the debt covenant?
At the end of 2020, Montvale Associates borrowed $120,000 from the Bayliner Bank. The debt covenant specified that Montvale’s debt/equity ratio could not exceed 1.5:1 during the period of the loan. A summary of Montvale’s balance sheet after the loan follows. 2020 Assets Current assets $130,000 Long-term assets 350,000 Total assets $480,000 Liabilities and Shareholders’ Equity Current liabilities $130,000 Long-term liabilities 150,000 Shareholders’ equity 200,000 Total liabilities and shareholders’ equity $480,000 Compute Montvale’s debt/equity ratio immediately after the loan. How much additional debt can the company incur without violating the debt covenant?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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E5.10 (LO 1) At the end of 2020, Montvale Associates borrowed $120,000 from the Bayliner Bank. The debt covenant specified that Montvale’s debt/equity ratio could not exceed 1.5:1 during the period of the loan. A summary of Montvale’s balance sheet after the loan follows.
2020 | |
Assets | |
Current assets | $130,000 |
Long-term assets | 350,000 |
Total assets | $480,000 |
Liabilities and Shareholders’ Equity | |
Current liabilities | $130,000 |
Long-term liabilities | 150,000 |
Shareholders’ equity | 200,000 |
Total liabilities and shareholders’ equity | $480,000 |
- Compute Montvale’s debt/equity ratio immediately after the loan.
- How much additional debt can the company incur without violating the debt covenant?
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