Financial risk its relationship to business risk and

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Unformatted text preview: act can be demonstrated by continuing the Cooke Company example. EXAMPLE Cooke Company’s current capital structure is as follows: Current capital structure Long-term debt $ Common stock equity (25,000 shares at $20) Total capital (assets) Hint As you learned in Chapter 2, the debt ratio is equal to the amount of total debt divided by the total assets. The higher this ratio, the more financial leverage a firm is using. 0 500,000 $500,000 Let us assume that the firm is considering seven alternative capital structures. If we measure these structures using the debt ratio, they are associated with ratios of 0, 10, 20, 30, 40, 50, and 60%. Assuming that (1) the firm has no current liabilities, (2) its capital structure currently contains all equity as shown, and (3) the total amount of capital remains constant16 at $500,000, the mix of debt and equity associated with the seven debt ratios would be as shown in Table 12.10. Also TABLE 12.10 Capital Structures Associated with Alternative Debt Ratio...
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This document was uploaded on 01/19/2014.

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