Last year, Arbor Corporation reported the following: Balance Sheet Total Assets Total Liabilities $ 800,000 500,000 $ 300,000 Total Shareholders' Equity This year, Arbor is considering whether to issue more debt to fund a $100,000 project or to issue additional shares of common stock. Both options will bring in exactly $100,000. Arbor's current debt contracts contain a debt covenant that requires it to maintain a debt- to-equity ratio of 2.0 or less. Required: 1. Calculate Arbor's current debt-to-equity ratio. 2. Calculate Arbor's debt-to-equity ratio assuming it funds the project using additional debt. 3. Calculate Arbor's debt-to-equity ratio assuming it funds the project by issuing common stock.
Last year, Arbor Corporation reported the following: Balance Sheet Total Assets Total Liabilities $ 800,000 500,000 $ 300,000 Total Shareholders' Equity This year, Arbor is considering whether to issue more debt to fund a $100,000 project or to issue additional shares of common stock. Both options will bring in exactly $100,000. Arbor's current debt contracts contain a debt covenant that requires it to maintain a debt- to-equity ratio of 2.0 or less. Required: 1. Calculate Arbor's current debt-to-equity ratio. 2. Calculate Arbor's debt-to-equity ratio assuming it funds the project using additional debt. 3. Calculate Arbor's debt-to-equity ratio assuming it funds the project by issuing common stock.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Vishnu
Transcribed Image Text:Last year, Arbor Corporation reported the following:
Balance Sheet
Total Assets
Total Liabilities
$ 800,000
500,000
$ 300,000
Total Shareholders' Equity
This
year, Arbor is considering whether to issue more debt to fund a $100,000 project or to issue additional shares of common stock.
Both options will bring in exactly $100,000. Arbor's current debt contracts contain a debt covenant that requires it to maintain a debt-
to-equity ratio of 2.0 or less.
Required:
1. Calculate Arbor's current debt-to-equity ratio.
2. Calculate Arbor's debt-to-equity ratio assuming it funds the project using additional debt.
3. Calculate Arbor's debt-to-equity ratio assuming it funds the project by issuing common stock.
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