Question

Kaye's Kitchenware has a market/book ratio equal to 1. Its stock price is $12 per share and it has 4.5 million shares outstanding. The firm's total capital is $110 million and it finances with only debt and common equity. What is its debt-to-capital ratio? Round your answer to two decimal places.

Answer 1

Solution :

As per the information given in the question

No. of shares outstanding = 4.5 Million ; Market price per share = $ 12 ;           

Thus Market value of equity = No. of shares outstanding * Market price per share

= 4.5 Million * $ 12 = $ 54 Million = $ 54,000,000

Thus the value of equity = $ 54,000,000

Further as per the information given in the question

The total capital = $ 110 million = $ 110,000,000

We know that total capital = value of equity + value of debt

Applying the available information in the above equation we have

$ 110,000,000 = $ 54,000,000 + Value of debt

$ 110,000,000 - $ 54,000,000 = Value of debt

$ 56,000,000 = Value of debt

Value of debt = $ 56,000,000

The formula for calculating the debt-to-capital ratio is

= Value of Debt / Value of total capital

We know that

Value of Debt = $ 56,000,000 ;   Value of total capital = $ 110,000,000 ;

Applying the available information in the formula for Debt to capital ratio we have

= $ 56,000,000 / $ 110,000,000

= 0.509091

= 0.51 ( when rounded off to two decimal places )

Thus the debt – to - total capital ratio = 0.51

Note : In percentage terms the debt - to - capital ratio is equal to 0.509091 * 100 = 50.91 %