Question

Charter Enterprises currently has

$1.2 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt​ ratios: 10 % 20% 30%​, 40%​, 50%​, 60%​, 90%.

​(Note: The amount of total assets would not​ change.) Is there a limit to the debt​ ratio's value?

Is there a limit to the debt ratio's value? (Select the best choice below.) O A. Theoretically, the debt ratio cannot exceed 100%. In practice, few creditors would extend loans to companies with exceedingly high debt ratios (> 70%). O B. Theoretically, the debt ratio cannot exceed 80%. In practice, few creditors would extend loans to companies with exceedingly high debt ratios (> 70%). O C. Theoretically, the debt ratio cannot exceed 70%. In practice, few creditors would extend loans to companies with exceedingly high debt ratios (> 70%). O D. Theoretically, the debt ratio cannot exceed 90%. In practice, few creditors would extend loans to companies with exceedingly high debt ratios (> 70%).

Answer 1

Debt Ratio = Total Debt / Total Assets

			$ In million
	Amount of Equity/Debt
Total assets	Equity	Debt	Debt Ratio	Equity Ratio
$                   1.20	$                1.08	$             0.12	10%	90%
$                   1.20	$                0.96	$             0.24	20%	80%
$                   1.20	$                0.84	$             0.36	30%	70%
$                   1.20	$                0.72	$             0.48	40%	60%
$                   1.20	$                0.60	$             0.60	50%	50%
$                   1.20	$                0.48	$             0.72	60%	40%
$                   1.20	$                0.12	$             1.08	90%	10%

yes, there is a limit to the debt ratio's value.

Best choice would be option A Theoritically, the debt ratio cannot exceed 100%. In practice, few creditors would extend loans to companies with exceedingly high debt raios (> 70%).