As a potential lender, why is First State Finances interested in the l

QUESTION

As a potential lender, why is First State Finances interested in the level of owners’ equity at Chesapeake Zoo?

A) It represents sales revenue that could be used to pay off loans.
B) Owners’ equity represents easily liquidatable assets.
C) It is a predictor of the firm’s profitability in the future.
D) It represents financial assets that could pay off loans if need be.
E) Owners’ equity shows what the firm’s current debt commitments are.

ANSWER

Answer: D
Explanation: D) Lenders are interested in the total value of the business as it is, in order to make sure that it has resources to pay back the loans even if profits are not made. Owners’ equity is value in the company that is already held by the owners in virtue of their ownership. It thus represents the ability to pay back loans if all else fails.