Montclair Company is considering a project that will require a $640,000 loan

Montclair Company is considering a project that will require a $640,000 loan. It presently has total liabilities of $150,000, and total assets of $690,000.

1.	Compute Montclair’s (a) present debt-to-equity ratio and (b) the debt-to-equity ratio assuming it borrows $640,000 to fund the project.

Explanation:

1.

(a)	Current debt-to-equity ratio = $150,000 / $540,000* = 0.28
	*Total equity = $690,000 – $150,000 = $540,000

 
 

(b)	Potential debt-to-equity ratio = $790,000* / $540,000 = 1.46
	*Total liabilities = $150,000 + $640,000 = $790,000