Reference no: EM132003262

The case states that Space-Age’s optimal capital structure calls for 20 percent long-term debt and 80 percent common equity. However, according to the 1992 balance sheet, the firm’s capitalization ratio is Long-term debt/Total permanent capital = $12,570,000/($12,570,000 + $17,490,000 + 11,310,000) = 0.304 = 30.4 percent, and its total-debt-to-total-assets ratio is $15,540,000/$44,340,000 = 35.1 percent. Do these figures indicate that the capital structure is seriously out of balance, that the company is using far too much debt, and that you should modify the mix of debt and equity used in the forecasts? (Hint: Think about whether the optimal capital structure should be stated in book value or market value terms.)