Question

Husavick Inc. borrowed $250,000 from a private lender. The loan agreement requires that Husavick's debt-to-equity ratio not exceed 2:1 at any time. The loan is repayable in 2023. You have been provided with the following information from Husavick's accounting records:
Husavick Inc.
Summarized Balance Sheet
For the Year Ended July 31, 2017
Assets:
Current assets................ $150,000
Non-current assets................ 615,000
Total assets.................. $765,000
Liabilities and shareholders' equity:
Current liabilities................ $115,000
Non-current liabilities.............. 375,000
Shareholders' equity............... 275,000
Total liabilities and shareholders' equity....... $765,000

Required:
a. Calculate Husavick's debt-to-equity ratio on July 31, 2017.
b. How much additional debt could Husavick have borrowed without violating the debt covenant on July 31, 2017?
c. How much could Husavick have paid in dividends during fiscal 2017 without violating the debt covenant?
d. What would be the effect on Husavick's debt-to-equity ratio if it declared a $25,000 dividend on July 31, 2017 that was to be paid on August 15, 2017?



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  • CreatedFebruary 26, 2015
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