The current balance sheet of Blawnox Inc.reports total assets of $20 million,total liabilities of $2 million,and owners' equity of $18 million.Blawnox Inc.is considering several financing possibilities in order to expand operations.What is the additional amount that Blawnox 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 $18 million * 0.3 = $5.4 million. Since current liabilities are $2 million, Blawnox Inc. can borrow an additional $5.4 million - $2 million = $3.4 million.

The Current Balance Sheet of Blawnox Inc