Question

Given the information in the table below, what is the simple capital structure for this firm?

Revenues - $5,000,000
Net income - $500,000
Current assets - $1,800,000
Non-current assets - $2,450,000
Current liabilities - $450,000
Long-term debt - $200,000
Total assets - $4,250,000
Total shareholders equity - $3,600,000

(A) about 15.3% debt and 84.7% equity
(B) about 28% debt and 72% equity
(C) about .18

Answer 1

The simple capital structure of the firm is about 15.3% debt and 84.7% equity, which is option (A). This is calculated using the total assets of the firm, and the respective values of debt and shareholders' equity.

Step-by-step explanation:

To determine the simple capital structure of a firm, we need to consider the proportions of debt and equity that finance the firm's assets. According to the information provided, the firm has current liabilities of $450,000 and long-term debt of $200,000, which totals $650,000 in overall debt. The total shareholders' equity is given as $3,600,000.

To calculate the percentages, you can use the following formula for each component:

• Debt ratio = (Total Debt / Total Assets) × 100
• Equity ratio = (Total Shareholders' Equity / Total Assets) × 100

In this case, total assets are $4,250,000, so:

• Debt ratio = ($650,000 / $4,250,000) × 100 ≈ 15.3%
• Equity ratio = ($3,600,000 / $4,250,000) × 100 ≈ 84.7%

Therefore, the simple capital structure for this firm is about 15.3% debt and 84.7% equity, which corresponds to option (A).