Share Transactions and Ethics} Marilyn Cox is the office manager for DTR Inc. DTR constructs, owns, and

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Share Transactions and Ethics}

Marilyn Cox is the office manager for DTR Inc. DTR constructs, owns, and manages apartment complexes. Marilyn has been involved in negotiations between DTR and prospective lenders as DTR attempts to raise \(\$ 425\) million to build apartments in a growing area of Vancouver. Based on her experience with past negotiations, Marilyn knows that lenders are concerned about DTR's debt-to-equity ratio. When the negotiations began, DTR had debt of \(\$ 80\) million and equity of \(\$ 50\) million. Marilyn believes that DTR's debt-to-equity ratio of 1.6 is probably the maximum that lenders will accept.

Marilyn is also aware that DTR issued \(\$ 10\) million of common shares to a long-time friend of the corporation's president in exchange for some land just before the negotiations with lenders began. The president's triend constructs and sells single-family homes. The land is in an area zoned only for single-family housing and would be an attractive site for single-family homes. Thus, the land is worth at least \(\$ 10\) million. However, DTR does not intend to build any singlefamily homes.

\section*{Required:}

1. What would have been DTR's debt-to-equity ratio if the \(\$ 10\) million of shares had not been issued for the land?

2. If Marilyn believes that the \(\$ 10\) million share issue was undertaken only to improve DTR's debt-to-equity ratio and that it will be reversed whenever the president's friend wants the land back or when DTR's debt-to-equity position improves, what should she do?

\section*{Case

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Cornerstones Of Financial Accounting

ISBN: 9780176707125

2nd Canadian Edition

Authors: Jay Rich, Jefferson Jones, Maryanne Mowen, Don Hansen, Donald Jones, Ralph Tassone

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