ontvale’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.
ontvale’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.
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?
- How large a dividend can the company declare and pay at the end of 2020 without violating the debt covenant?
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