The balance sheet as of December 31, 1996, for Melrose Enterprises follows. (Disclosing debt and debt covenants) Assets Liabilities and Stockholders’ Equity Current assets $200,000 Current liabilities $200,000 Noncurrent assets 700,000 Long-term liabilities 300,000 Total assets $900,000 Stockholders’ equity Total liabilities and stockholders’ equity 400,000 $900,000 During 1996 Melrose entered into a loan agreement that required the company to maintain a debt/equity ratio of less than 2:1. Chapter 1 1 Long-Term Liabilities: Notes, Bonds, and Leases 569 REQUIRED:

a. How much additional debt can Melrose take on before it violates the terms of the loan agreement?

b. Assume that during 1997 Melrose had revenues of $950,000 and expenses of $800,000. Assume that all revenues and expenses were in cash. How much additional debt can Melrose take on before it violates the terms of the loan' agreement?

c. Assume again that during 1997 Melrose has cash revenues of $950,000 and cash expenses of $800,000. If Melrose pays a cash dividend of $100,000, how much additional debt can it take on before violating the terms of the loan agreement? If Melrose declares, but does not pay, the dividend during 1997, does it make a difference in the amount of additional debt the company can take on