(Debt-Maturity mix) A company has $25 million current assets and another $25 mil

Question

(Debt-Maturity mix) A company has $25 million current assets and another $25 million of noncurrent assets. It forecasts an EBIT of $5 million and is in the 35% income tax bracket. Currently the yield curve is normal bank, notes carry a 7% interest rate, and the company can issue long-term bonds at 12%. The company has set a target debt ratio of 40%. For each of the following debt maturity mixes: (1) construct the company's balance sheet, (2) construct the financial half of its income statement, and (3) evaluate its risk and return using the return on equity and current ratio. 20% of the debt is current, 80% long-term 40% of the debt is current, 60% long-term 60% of the debt is current, 40% long-term 80% of the debt is current, 20% long-term

Explanation / Answer

Total Company Assets = Current + Non-Current Assets = $25 million + $25 million = $50 million

Debt Ratio = 40% this means that the company's total assets are financed by 40% debt and 60% owner's equity
Equity = 60% * 50 million = $30 million
Debt = 40% * 50 million = $20 million

1. Balance Sheet and Financial Half of Income Statement for 20-80 Debt maturity mix

Balance Sheet for

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