Question

Marilyn Cox is the office manager for DTR, Inc. DTR constructs, owns, and manages apartment complexes. Marilyn has been involved in negotiations between DTR and prospective lenders as DTR attempts to raise $425 million to use to build apartments in a growing area of Tulsa. Based on her experience with past negotiations, Marilyn knows that lenders are concerned about DTR’s debt-to-equity ratio. When the negotiations began, DTR had debt of $80 million and equity of $50 million. Marilyn believes that DTR’s debt-to-equity ratio of 1.6 is probably the minimum that lenders will accept.
Marilyn is also aware that DTR issued $10 million of common stock to a long-time friend of the corporation’s president in exchange for some land just before the negotiations with lenders began. The president’s friend constructs and sells single family homes. The land is in an area zoned only for single family housing and would be an attractive site for single family homes. Thus, the land is worth at least $10 million. However, DTR does not intend to build any single family homes.

Required:
1. What would have been DTR’s debt-to-equity ratio if the $10 million of stock had not been issued for the land?
2. If Marilyn believes that the $10 million stock issue was undertaken only to improve DTR’s debt-to-equity ratio and that it will be reversed whenever the president’s friend wants the land back or when DTR’s debt-to-equity position improves, what should she do?


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  • CreatedSeptember 22, 2015
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