A New Firm Is Developing Its Business Plan

Multiple Choice

A new firm is developing its business plan.It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year.Management is quite sure of these numbers because of contracts with its customers and suppliers.It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt.What is the maximum debt-to-assets ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)

A) 47.33%
B) 49.82%
C) 52.45%
D) 55.21%
E) 58.11%