How much can be borrowed in the following case to maintain a debt-equity ratio of 0.75? Hogi Co. has a total debt of $252,000 and stockholders' equity of $420,000. Hogi is seeking capital to fund an expansion and plans to issue an additional $180,000 in common stock. It is also negotiating with a bank to borrow additional funds.  The bank requires a maximum debt-equity ratio of 0.75.  What is the maximum additional amount Hogi will be able to borrow after the common stock is issued?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

Hogi Co. currently has a total debt of $252000 and it has issued equity for $420000. It plans to finance its expansion by issuing new equity worth $180000. The total value of equity issued would then be equal to $420000 + $180000 = $600000

Let the amount of money the company is able to borrow from the bank be equal to D. As the maximum debt-equity ratio that the bank is willing to accommodate is 0.75, we get D / $600000 = 0.75

=> D = 0.75*$600000

=> D = $450000

Currently the debt that the company has is $252000, so it can borrow an additional amount of $450000 - $252000 = $198000, while ensuring that the debt equity ratio does not exceed 0.75.

After the new stock is issued, the company can borrow an additional $198000.

Approved by eNotes Editorial Team