Question

Montclair Company is considering a project that will require a $500,000 loan. It presently has total liabilities of $220,000, and total assets of $620,000. 1. Compute Montclair’s (a) present debt-to-equity ratio and (b) the debt-to-equity ratio assuming it borrows $500,000 to fund the project.

	Choose Numerator:	/	Choose Denominator:
	Total liabilities	/	Total equity	Debt-to-Equity Ratio
(a)	$220,000	/	$400,000		0.55
(b)	$720,000	/			0

Answer 1

Concepts and reason

Financing: Financing enables corporations pursue their investment objectives. Financing can be from the equity shareholders or creditors. Equity shareholders take risk and own profits and losses of the Corporation. Creditors does not own the Corporation but they should be paid interest without regard to profits of the Corporation.

Fundamentals

Debt to equity ratio: Debt to equity ratio is calculated using the below formula:

It denotes relative percent of debt and equity used in financing assets of the organization.

Debt to equity ratio is:

Thus, debt to equity ratio is

Debt to equity ratio is:

Thus, debt to equity ratio is

Ans: Part a

Debt to equity ratio is 0.55

Part b

Debt to equity ratio is 1.80