Question

A firm you are studying as a possible investment is known for using a lot of debt to finance its assets. You wonder just how much debt that really is and decide to quickly calculate its long-term capital structure. You note that current liabilities are $38 million, long-term debt in the form of bonds is $106 million, total shareholders' equity is $47 million, and short-term notes payable is $20 million. What is the proportion of debt used in this company's long-term capital structure?

Answer 1

The proportion of debt in the company's long-term capital structure is approximately 69.28%, calculated by dividing the long-term debt by the sum of the long-term debt and shareholder's equity.

Step-by-step explanation:

To calculate the proportion of debt used in the company's long-term capital structure, we need to sum up the long-term debt and any other debt components that are considered long-term financing. In this case, the long-term debt is $106 million. We typically don't include current liabilities and short-term notes payable in this calculation as they are due within one year. Therefore, the total long-term debt used in the capital structure is $106 million. To find the proportion of debt, we divide this by the sum of the long-term debt and shareholder's equity: $106 million/(106 million + $47 million) = $106 million/$153 million = 0.6928 or 69.28%.

Therefore, the proportion of debt in the company's capital structure is approximately 69.28%.