Question

A firm has current assets of $1,198,159.00 and net fixed assets of $3,925,832.00. The firm has current liabilities of $791,494.00, and total shareholder equity of $2,901,373.00. How much long term debt should the firm have to support its assets?

Answer 1

To determine how much long-term debt the firm should have to support its assets, we first need to calculate the total assets and total liabilities of the firm.

1. **Total Assets**: This can be found by adding current assets to net fixed assets.
\[
\text{Total Assets} = \text{Current Assets} + \text{Net Fixed Assets}
\]
\[
\text{Total Assets} = 1,198,159 + 3,925,832 = 5,123,991
\]

2. **Total Liabilities**: This includes current liabilities and long-term debt. We can express it as:
\[
\text{Total Liabilities} = \text{Current Liabilities} + \text{Long-Term Debt}
\]

3. **Equity**: We know the total equity of the firm is the difference between total assets and total liabilities:
\[
\text{Total Assets} = \text{Total Liabilities} + \text{Equity}
\]
Rearranging gives us:
\[
\text{Total Liabilities} = \text{Total Assets} - \text{Equity}
\]
Substituting the values we have:
\[
\text{Total Liabilities} = 5,123,991 - 2,901,373 = 2,222,618
\]

4. **Calculate Long-Term Debt**: We can now substitute the total liabilities formula:
\[
\text{Total Liabilities} = \text{Current Liabilities} + \text{Long-Term Debt}
\]
Rearranging gives us:
\[
\text{Long-Term Debt} = \text{Total Liabilities} - \text{Current Liabilities}
\]
Substituting the current liabilities:
\[
\text{Long-Term Debt} = 2,222,618 - 791,494 = 1,431,124
\]

So, the firm should have **$1,431,124.00** in long-term debt to support its assets.