Question

Last year, Arbor Corporation reported the following: Balance Sheet Total Assets $ 1,280,000; Total Liabilities 820,000; Total Shareholders' Equity $ 460,000This year, Arbor is considering whether to issue more debt to fund a $100,000 project or to issue additional shares of common stock. Both options will bring in exactly $100,000. Arbor's current debt contracts contain a debt covenant that requires it to maintain a debt-to-equity ratio of 2.00 or less.1. Calculate Arbor's current debt-to-equity ratio2. Calculate Arbor's debt-to-equity ratio assuming it funds the project using additional debt.3. Calculate Arbor's debt-to-equity ratio assuming it funds the project by issuing common stock

Answer 1

a) Debt to equity ratio = Total liabilities/Total equity

= 820000/460000 = 1.78 Times

b) Debt to equity ratio = Total liabilities/Total equity

= 920000/460000 = 2.00 Times

c) Debt to equity ratio = Total liabilities/Total equity

= 820000/560000 = 1.46 Times