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Kaye's Kitchenware has a market/book ratio equal to 1. Its stock price is $15 per share...

Kaye's Kitchenware has a market/book ratio equal to 1. Its stock price is $15 per share and it has 4.7 million shares outstanding. The firm's total capital is $135 million and it finances with only debt and common equity. What is its debt-to-capital ratio? Round your answer to two decimal places.

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Expert Solution

The firm's market value of equity to book value of equity ratio is 1. Therefore the Market Value of Equity is same as Book Value of Equity.

We can write, Book Value of Equity = Market Value of Equity --------------------------------------------------------------Equation 1

Market Value of Equity = Stock Price * No of shares outstanding ( Given Stock Price = $15, Shares Outstanding = 4.7 million)

Thus Market Value of Equity = 15 * 4.7 = $70.5 million

From Equation 1, Book Value of Equity = $70.5 million

Now we will find the value of Debt using Total Capital. Given Total Capital is $135 million

Total Capital of a firm = Debt + Common Equity (Given firm finance through these two only)------------------------ Equation 2

135 million = Debt + 70.5 million

Debt = 64.5 million ---------------------------------------------------------------------------------------------------------------------- Equation 3

Thus Debt to Capital Ratio = Debt/ Total Capital

= 64.5/135

= 0.48 ----------------------------------------------------------------------------------------------------Final Answer

jeff jeffy answered 4 months ago
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