Santana Rey has consulted with her local banker and is considering financing an expansion of her business by obtaining a long-term bank loan. Selected account balances at March 31, 2012 for Business Solutions follow.
Total Assets 120,268
Total liabilities 875
Total equity 119,393
Required:
1. The bank has offered a long-term secured note to Business Solutions. The bank’s loan procedures require that a client’s debt-to-equity ratio not exceed 0.8. As of March 31, 2012, what is the maximum amount that Business Solutions could borrow from this bank (rounded to nearest dollar)?
2. If Business Solutions borrows the maximum amount allowed from the bank, what percentage of assets would be financed (a) by debt and (b) by equity?
3. What are some factors Santana Rey should consider before borrowing the funds?