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Unformatted text preview: m of offbalance sheet financing for SuperValu. Supervalu
does not have to show these future liabilities on its balance sheet. These future contractual payments are
disclosed in the footnotes. One of the advantages of this approach is that these liabilities are not used in
the calculation of financial ratios. EXERCISES
a. Melrose Enterprises' debt/equity ratio is currently 1.25 [($200,000 + $300,000) ÷ $400,000]. The company's loan agreement specifies that debt can be twice the stockholders' equity. Consequently, the
company's debt cannot exceed $800,000. Since Melrose Enterprises already has $500,000 in debt, the
company can borrow an additional $300,000.
b. By definition, Melrose Enterprises will settle its December 31, 2011 current liabilities sometime during
2012. The company will probably also incur new current liabilities as of December 31, 2012. Since no
information is provided as to the expected amount of current liabilities as of December 31, 2012, a
reasonable assumption is that these liabilities will remain at $200,000. Consequently, Melrose Enterprises
would have total debt of $500,000 and total stockholders' equity of $550,000 ($400,000 + $950,000 in
revenues – $800,000 in expenses). The company could now borrow a total of $1,100,000 ($550,000 2)
without violating the debt covenant. Melrose Enterprises could, therefore, borrow an additional $600,000. c. At the end of 2012, Melrose Enterprises would have $200,000 in current liabilities and $300,000 in
longterm debt for total debt of $500,000, and it would have $450,000 in stockholders' equity ($400,000 +
$950,000 in revenues – $800,000 in expenses – $100,000 in declared dividends). The company could now
borrow a total of $900,000 (i.e., $450,000 2) without violating its debt covenant. Consequently, Melrose
Enterprises could borrow an additional $400,000.
If Melrose Enterprises declares, but does not pay, the $100,000 dividend, the company's debt/equity ratio
will be affected. Dividends that are declared but not paid are typ...
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- Fall '08