At the end of 1996, 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. 1 996 Assets Current assets Noncurrent assets Total assets $ 130,000 350,000 $ 480,000 1996 Liabilities and Stockholders’ Equity Current liabilities $ 130,000 Long-term liabilities 150,000 Stockholders’ equity 200,000 Total liabilities and stockholders’ equity $480,000 E3—1 2 (Examining market ratios over time) REQUIRED:

a. Compute Montvale’s debt/equity ratio immediately after the loan.

b. How much additional debt can the company incur without violating the debt covenant?

c. How large a dividend can the company declare and pay at the end of 1996 without violat¬ ing the debt covenant?

d. If Montvale had declared, but not yet paid, a $20,000 dividend before it took out the loan, could the company pay the dividend afterwards without violating the debt covenant? Why or why not?