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An acceptable debt equity ratio

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Frank, Cora and Mitch are equal shareholders in Purple Corporation. The corporation's assets have a tax basis of 50,000 and a fair market value of 600,000. In the current year, Frank and Cora each loan Purple Corporation 150,000. The notes to Frank and Cora bear interest of 8% per annum. Mitch leases equipment to Purple Corporation for an annual rental of 12,000. Discuss whether the shareholder loans from Frank and Cora might be reclassified as equity. Consider in your discussion whether Purple Corporation has an acceptable debt equity ratio. 

Reference no: EM13654354

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