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Exercise 5-11 At the end of 2017, Montvale Associates borrowed $120,000 from the Bayliner Bank. The debt covenant specified that Montvale's debt/equity ratio could not
Exercise 5-11 At the end of 2017, Montvale Associates borrowed $120,000 from the Bayliner Bank. The debt covenant specified that Montvale's debt/equity ratio could not exceed 1.5:1 during the period of the loan. A summary of Montvale's balance sheet after the loan follows. 2017 Assets Current assets $130,000 350,000 Noncurrent assets Total assets $480,000 Liabilities and Shareholders' Equity Current liabilities Long-term liabilities $130,000 150,000 200,000 $480,000 Shareholders' equity Total liabilities and shareholders' equity How large a dividend can the company declare and pay at the end of 2017 without violating the debt covenant? (Round answer to 0 decimal places, e. g. 125.) x Dividend Your answer is partially correct. Try again. If Montvale had declared, but not yet paid, a $20,000 dividend before it took out the loan, could the company pay the dividend afterward without violating the debt covenant? Why or why not? (Round answer to 2 decimal places, e. g. 12.25.) Debt/equity ratio could less than Since debt/equity ratio is without violating its debt covenant. the maximum debt/equity ratio allowed under the debt covenant, Montvale pay the $20,000 dividend
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