Question

Kaye's Kitchenware has a market/book ratio equal to 1. Its stock price is $16 per share and it has 5.5 million shares outstanding. The firm's total capital is $125 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 we have

Stock price per share = $ 16 per share

No. of shares outstanding = 5,500,000

Thus the market value of equity = $ 16 * 5,500,000

= $ 88,000,000

Since the market to book ratio = 1, it can be inferred that the market value of equity = book value of equity = $ 88,000,000

As per the information given in the question we have

Total capital = $ 125,000,000

We know that Debt capital + Equity capital = Total capital

Applying the available information in the equation we have

Debt capital + Equity capital = $ 125,000,000

Debt capital + $ 88,000,000 = $ 125,000,000

Debt capital = $ 125,000,000 - $ 88,000,000 = $ 37,000,000

The Debt to Total capital ratio is calculated using the following formula

= Debt Capital / ( Debt capital + Equity Capital )

As per the information derived above and available in the question we have

Debt to total capital ratio
= $ 37,000,000 / $ 125,000,000

= 0.2960

= 0.30 ( when rounded off to two decimal places )

Thus the Debt to Capital ratio = 0.30