Barr Co. has total debt of $420,000 and equity of $700,000. Barr is seeking capital to fund an expansion. Barr is planning to issue an additional $300,000 in common stock and is negotiating with a bank to borrow additional funds. The bank requires a debt-to-equity ratio of .75. What is the maximum additional amount Barr will be able to borrow?

$330,000

Explanation:

The debt-equity ratio is the ratio hat shows the rel,relationship between debt and equity. It a a measure of financial risk.

Debt-equity ratio = Debt/Equity

Debt-equity ratio= 0.75

Maximum additional debt that Barr will be able t borrow =

Target debt - existing amount of debt

Total target equity for Barr =( 700000+ 300000)= 1,000,000

0.75 = target debt/1,000,000

Target debt = 0.75× 1,000,000

                   = 750,000

Maximum debt additional debt that Barr will be able t borrow =

Target debt - existing amount of debt

= 750,000 - 420,000

= $330,000

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