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Frusciante, Inc. has 285,000 bonds outstanding. The bonds have a par value of $1,000, a coupon...

Frusciante, Inc. has 285,000 bonds outstanding. The bonds have a par value of $1,000, a coupon rate of 6.9 percent paid semiannually, and 7 years to maturity. The current YTM on the bonds is 6.4 percent. The company also has 9 million shares of stock outstanding, with a market price of $27 per share. What is the company’s market value debt–equity ratio?

Solutions

Expert Solution

Step-1:Calculation of current value of bond
Semi annual period Cash flow Discount factor Present Value
1-14 $    34.50                     11.1436 $             384.45
14 $    1,000                        0.6434 $             643.40
Total $          1,027.86
Working:
Present Value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.032)^-14)/0.032 i 6.4%/2 = 0.032
=                     11.1436 n 7*2 = 14
Present Value of 1 = (1+i)^-n
= (1+0.032)^-14
=                        0.6434
Semi annual coupon interest = Par Value x Semi annual couopon rate
= $                      1,000 x 6.9%/2
= $                      34.50
Step-2:Calculation of selling value of total bonds
Total value of bonds = Total number of bonds x Selling price of a bond
(Debt) =                    2,85,000 x $          1,027.86
= $       29,29,39,817
Step-3:Calculation of total value of Equity
Total Market value of equity = Number of shares x Market price per share
(Equity) =                  90,00,000 x $                      27
= $       24,30,00,000
Step-4:Calculation of company’s market value debt–equity ratio
Company’s market value debt–equity ratio = Market Value of Debt/Market Value of Equity
= $ 29,29,39,817 / $ 24,30,00,000
= 1.21
Thus,
Company’s market value debt–equity ratio is           1.21

ekkarill92 answered 2 years ago
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