Question

Hardesty Manufacturing currently has factories in North Carolina and Virginia. They would like to build another factory in Tennessee, but their current debt limitation will not allow them to receive financing for the new factory. Therefore, they create a special-purpose entity to obtain financing to build the new factory. Hardesty guarantees that they will purchase 50% of the finished products, and they obtained contracts from two other companies who will each purchase 25% of the finished products from the new factory. If the new factory cost $3.5 million to build and it was completely financed by debt instruments, how much debt will Hardesty be required to add to their balance sheet?

• A :

  $3,500,000

• B :

  $0

• C :

  $1,750,000

• D :

  $875,000

Answer 1

It is clearly mention in the question that Hardesty Manufacturing has current debt limitation and it will not allow them to receive financing for the new factory, therefore they created new special purpose entity.

Product purchased by them and other 2 companies is irrelevant for finding out the debt requirements.

Therefore special purpose entity will borrow complete $3,500,000 And,

Hardesty Manufacturing will borrow $0 due to current debt limitation.

Therefore answer is (B).