Moab Company has total assets of $3,500,000 and total liabilities of $3,000,000.
ID: 2596769 • Letter: M
Question
Moab Company has total assets of $3,500,000 and total liabilities of $3,000,000. Moab is considering two alternatives for acquiring additional warehouse space. Under the first alternative, the building would be purchased for $200,000 and financed by issuing long-term bonds. Under the second alternative, the building would be rented with an annual lease cost of $20,000 per year.
Round answers to one decimal place, if applicable.
a. Compute the company's current debt-to-equity ratio.
b. What effect would the addition of warehouse space have on its debt-to-equity ratio?
Compute the debt-to-equity ratio under the following assumptions.
1. Assuming the building is purchased by issuing bonds?
2. Assuming the building is rented on an annual lease basis?
Explanation / Answer
Total assets 3500000 Total liabilities 3000000 Total equity 500000 Debt to equity ratio = Total liabilities / stockholders equity Debt to equity ratio 6 (3000000/500000) b) Building is purchased Total liabilities 3200000 Stockholders equity 500000 Debt equity ratio 6.40 (3200000/500000) Building is Leased Total liabilities 3000000 Stockholders equity 480000 (500000-20000) Debt equity ratio 6.25