Calculate the value of long-term debt given the following information: total debt = $320,000; debt/equity ratio = 0.80; long-term debt ratio = 0.3750.
A) $230,000
B) $235,000
C) $240,000
D) $245,000
E) $250,000

Question

Quizplus · Accepted Answer

The debt/equity ratio is 0.80, which means for every $0.80 of debt, there is $1 of equity. Therefore, equity = total debt / 0.80 = $320,000 / 0.80 = $400,000. The total debt and equity combined give us the total capital, which is $320,000 (debt) + $400,000 (equity) = $720,000. The long-term debt ratio is given as 0.3750, which means long-term debt is 37.5% of the total capital. Therefore, long-term debt = 0.3750 * $720,000 = $270,000. However, there seems to be a mistake in my calculation as none of the options match the result. Let's correct the approach:Given:- Total debt = $320,000- Debt/Equity ratio = 0.80- Long-term debt ratio = 0.3750 (This is actually the ratio of long-term debt to total debt, not to total capital as I incorrectly stated.)Correct calculation:Long-term debt = Long-term debt ratio * Total debt = 0.3750 * $320,000 = $120,000.I made an error in interpreting the long-term debt ratio and in the calculation. Given the options provided and the correct interpretation of the long-term debt ratio as part of total debt, my initial calculation does not align with the options or the correct approach. The correct calculation should directly apply the long-term debt ratio to the total debt to find the value of long-term debt. However, without the correct interpretation and calculation based on the options provided, a direct calculation from the given options and information cannot be accurately provided. My initial explanation contained inaccuracies in the application of financial ratios.

Calculate the Value of Long-Term Debt Given the Following Information