The two alternative capital structures result in debt

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Unformatted text preview: lent amount of common stock. The two alternative capital structures result in debt ratios of 30% and 60%, respectively. The basic information on the current and two alternative capital structures is summarized in Table 11.9. 446 PART 4 Long-Term Financial Decisions TABLE 11.9 Capital structure debt ratio (1) Total assetsa (2) 0% (current) 30 500,000 60 Basic Information on JSG Company’s Current and Alternative Capital Structures $500,000 150,000 Debt [(1) (2)] (3) Equity [(2) (3)] (4) Interest rate on debtb (5) $ $500,000 0% 0 350,000 500,000 300,000 Annual interest [(3) (5)] (6) $ 0 10 200,000 Shares of common stock outstanding [(4) $20]c (7) 25,000 15,000 16.5 49,500 17,500 10,000 aBecause for convenience the firm is assumed to have no current liabilities, total assets equals total capital of $500,000. interest rate on all debt increases with increases in the debt ratio due to the greater leverage and risk associated with higher debt ratios. cThe $20 value represents the book value of common stock equi...
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