Answer to Question #129710 in Financial Math for Yamkela Banjwa

Question

Lights Ltd. has raised funds by way of a bank loan. The bank loan came with a covenant of the company maintaining a debt ratio of 0.5. The company currently has total assets of R1 000 000 and total liabilities of R500 000. How much more can the company borrow without breaching its covenant?

Answer 1

debt ratio is calculated using the following formula:

debt ratio = liabilities / assets

the required debt ratio = 0.5

assets = 1000,000

liabilities =x

0.5 = x/1000,000

x= 1000,000 x 0.5

x = R500,000

for the debt ratio to be maintained at 0.5, the liabilities should be R500,000

since lights limited already has 500,000 as liabilities, amount needed to be borrowed

=required liabilities - available liabilities

= 500000 - 500,000

=R 0

in order for the company not to breach the covenant of retaining a 0.5 debt ratio it can not borrow any more hence the answer is

=R0