Answer :
Answer:
the company can borrow maximum of $268,000
Explanation:
Given:
total liabilities = $660,000
total equity = $342,000
Total Cost of shares = 12,000 shares × $15 = $180,000
Total asset before loan = total liabilities + total equity + Cost of shares
=$660,000 + $342,000 + 180,000
= $1,182,000
Let x represent the maximum amount that the company can borrow =
(Total liabilities + x) ÷ ( Total asset before loan + x) = debt-to-asset ratio
Where debt-to-asset ratio = 0.64
So ($660,000+ x) / ($1,182,000 + x) = 0.64
Cross multiply
$660,000+ x = 0.64 ($1,182,000 + x)
$660,000+ x = 756,480 + 0.64x
x - 0.64x = $756,480 - $660,000
0.36x = $96,480
x = $268,000
the company can borrow maximum of $268,000
Answer: $268,000
Explanation:
GIVEN the following ;
TOTAL LIABILITIES = $660,000
TOTAL EQUITY = $342,000
IN ADDITION:
SHARES TO BE ISSUED = 12,000
PRICE PER SHARE = $15
MAXIMUM LIABILITY ABC CAN BORROW =?
MAXIMUM DEBT-TO-ASSET RATIO = 0.64
TOTAL AMOUNT RAISED FROM BOTH EQUITY AND LIABILITY:
$(660,000 + 342,000 + (12,000 × $15))
$(660,000+342,000+180,000) = $1,182,000
THEREFORE, MAXIMUM LIABILITY WHICH COULD BE ADDED SUCH THAT MAXIMUM-DEBT-ASSET RATIO WILL NOT EXCEED 0.64 CAN BE CALCULATED THUS:
LET MAXIMUM ADDITIONAL LIABILITY = Y
MAXIMUM-DEBT-ASSET RATIO = TOTAL LIABILITY / (TOTAL EQUITY + TOTAL LIABILITY)
0.64 = ($660,000 + Y) / ($1,182,000 + Y)
0.64×($1,182,000+Y) = $660,000 +Y
$756,480 + 0.64Y = $660,000 + Y
0.64Y- Y = $(660,000 - 756,480)
-0.36Y = - $96,480
Y = $268,000
Company ABC Can borrow a maximum of $268,000