The current balance sheet of Handyman Inc.reports total assets of $20 million, total liabilities of $2 million, and owners' equity of $18 million.Handyman Inc.is considering several financing possibilities in order to expand operations.
What is the additional amount that Handyman Inc.can borrow and not exceed a debt to equity ratio of 0.3?
A)$5.4 million
B)$3.4 million
C)$5.5 million
D)$4.0 million

Question

Quizplus · Accepted Answer

To maintain a debt to equity ratio of 0.3, the total liabilities should be 0.3 times the owners' equity. With owners' equity of $18 million, the maximum allowable liabilities are $5.4 million (0.3 * $18 million). Since current liabilities are $2 million, Handyman Inc. can borrow an additional $3.4 million ($5.4 million - $2 million).

The Current Balance Sheet of Handyman Inc