An All-Equity New Firm Is Developing Its Business Plan

Multiple Choice

An all-equity new firm is developing its business plan. It will require $615,000 of assets (which equals common equity) , and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably 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 4.0The firm will use debt and common equity for financing. What is the maximum debt to capital ratio (measured as debt/total common equity) the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt to capital ratio.)

A) 44.15%
B) 46.47%
C) 48.92%
D) 51.49%