CHAPTER 4-10

# CHAPTER 4-10 - Capital intensity ratio = Fixed assets Full...

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Capital intensity ratio = Fixed assets / Full capacity sales Capital intensity ratio = \$413,000 / \$1,161,250 Capital intensity ratio = .35565 The fixed assets required at full capacity sales is the capital intensity ratio times the projected sales level: Total fixed assets = .35565(\$1,161,250) = \$396,480 So, EFN is: EFN = (\$183,480 + 396,480) – \$613,806 = –\$95,272 Note that this solution assumes that fixed assets are decreased (sold) so the company has a 100 percent fixed asset utilization. If we assume fixed assets are not sold, the answer becomes: EFN = (\$183,480 + 413,000) – \$613,806 = –\$166,154 27. The D/E ratio of the company is: D/E = (\$85,000 + 158,000) / \$322,900 D/E = .7526 So the new total debt amount will be: New total debt = .7526(\$418,632) New total debt = \$315,044 This is the new total debt for the company. Given that our calculation for EFN is the amount that must be raised
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