Last year, Spruce Company reported the following:

This year, Spruce is considering whether to issue more debt to fund a $200,000 project or to issue additional shares of common stock. Both options will bring in exactly $200,000. Spruce’s current debt contracts contain a debt covenant that requires it to maintain a debt-to-equity ratio of 2.5 or less.

Required:
1. Calculate Spruce’s current debt-to-equity ratio.
2. Calculate Spruce’s debt-to-equity ratio assuming it funds the project using additional debt.
3. Calculate Spruce’s debt-to-equity ratio assuming it funds the project by issuing common stock.
4. How do you recommend Spruce fund the project?

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BALANCE SHEET Total Assets Total Liabilities Total Shareholders' Equity $900,000 600,000 300,000