AK, Inc Is Considering Issuing Additional Long-Term Debt to Finance an an Expansion

AK, Inc. is considering issuing additional long-term debt to finance an expansion. The company currently has $20 million in 5% debt outstanding. Its earnings after-tax (EAT) are $3.0 million, and its marginal and average tax rate is 40 percent. The company is required by the debt holders to maintain its times interest earned ratio at 3.0 or greater. How much additional 10 percent debt can the company issue now and maintain its times interest earned ratio at 3.0? Assume for this calculation that earnings before interest and taxes remains at its present level.

A) $10 million
B) $ 6 million
C) $ 1 million
D) $5 million

Correct Answer:

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