Debt/Equity Ratio. The present capital structure of Jones Corporation is shown below.
|
Debentures
|
$1,200,000
|
|
Collateral bonds
|
2,800,000
|
|
Preferred stock
|
700,000
|
|
Common stock
|
2,600,000
|
|
Total
|
$7,300,000
|
There is a high financial leverage position:
Debt/Equity=$4,000,000/$3,300,000=1.21
The business is worth $4.7 million as a going concern. The trustee has formulated a less leveraged capital structure having a total capital of $4.7 million as follows:
|
Debentures
|
$ 800,000
|
|
Collateral bonds
|
1,500,000
|
|
Income bonds
|
1,300,000
|
|
Preferred stock
|
400,000
|
|
Common stock
|
700,000
|
|
Total
|
$4,700,000
|
What is the new debt/equity ratio?