Capital Structure Decision and Cost of Capital

Capital Structure Decision and Cost of Capital

Compute the debt ratio of your company (total liabilities divided by the total liabilities plus equity) and the debt to equity ratio, (total liabilities divided by total equity). Also, show these two ratios for short-term liabilities only and for long-term liabilities only (instead of total liabilities use just short-term liabilities and long-term liabilities). Show all of your work and calculations.

Solution: Following are the financial figures of the assumed company, Burberry.

2007

2008

2009

£000

£000

£000

Sales

850

995

1,202

Cost of sales

329

378

536

Gross profit

521.3

617.7

665.8

Expenses

28.1

-4.5

190.7

Profit before interest & taxation

157

201.7

-9.9

Interest

0.7

6

6.2

Taxation

46.1

60.5

11

Profit for the year

110.2

135.2

-6

446.1

442.8

438.1

Assets

Non-current assets

Property, plant, and equipment

326

364.8

383.3

Current assets

Inventory

149.8

268.6

262.6

Trade receivables

137.2

169.2

187.2

Cash

136.7

150.6

292.6

423.7

588.4

742.4

Total assets

749.7

953.2

1125.7

Liabilities

Current ...