Question

Need insight on question b. please COMPANY ABC

Accounts payable $510,000 , Notes payable $256,000, Current liabilities $766,000, Long-term debt $1,114,000, Common equity $4,779,000, Total liabilities & equity $6,659,000

a. What percentage of the firm's assets does the firm finance using debt (liabilities)? The fraction of the firm's assets that the firm finances using debt is 28.2%.

b. If ABC were to purchase a new warehouse for $ 1.1 million and finance it entirely with long-term debt, what would be the firm's new debt ratio? The new debt ratio will be %_________. (Round to one decimal place.)

Answer 1

a)
Total Assets = Total Liabilities and Equity = $6,659,000

Total Liabilities = Current Liabilities + Long-term Debt
= $766,000 + $1,114,000
= $1,880,000

Debt Ratio = Total Liabilities / Total Assets
= $1,880,000 / $6,659,000
= 28.2%

b)
Total liabilities = $1,880,000 + $1,100,000 = $2,980,000

Total assets = $6,659,000 + $1,100,000 = $7,759,000

New debt ratio = Total Liabilities / Total Assets
= $2,980,000 / $7,759,000
= 38.4%