Reference no: EM132763003

Apple Industries borrowed $491,000 from Security Bankers to finance the purchase of equipment costing $358,000 and to provide $133,000 in cash. The note states that the loan matures in 20 years, and the principal is to be paid in annual installments of $24,550. The terms of the loan also indicate that Headland must maintain a current ratio of 2:1 and cannot pay dividends that will reduce retained earnings below $197,000.

The balance sheet of Headland, immediately prior to the bank loan and the purchase of equipment, follows:

Current assets $ 118,000

Current liabilities $ 99,000

Noncurrent assets $ 1,480,000

Long-term liabilities $ 300,000

Common stock $ 983,000

Retained earnings $ 216,000

Total assets $1,598,000

Total liabilities and shareholders' equity $ 1,598,000

Problem 1: The board of directors of Apple Industries is about to declare a dividend to be paid to the shareholders early next year. After accepting the loan and purchasing the equipment, how large a dividend can the board pay and not violate the terms of the debt covenant? Calculate the current ratio after the bank loan and purchase of equipment.