Question

Asked Mar 31, 2019

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Kaye's Kitchenware has a market/book ratio equal to 1.200. The firm's stock price is 12.30 USD/share. There are 4.60 million shares outstanding. The firm's total capital is 111 million and the firm finances with only debt and common equity. Calculate the debt to equity ratio."

Step 1

Market/book ratio of equity = 1.200

Hence, MV_{E} / BV_{E} = 1.2

Current stock price, P = $ 12.30 / share

Nos. of shares outstanding = N = 4.60 million

Step 2

Hence, MV_{E} = P x N = 12.30 x 4.60 = $ 56.58 million

Also, MV_{E} / BV_{E} = 1.2

Hence, BV_{E} = MV_{E} / 1.2= 56.58 / 1.2 = $ 47.15 mn

Step 3

The firm's total capital is 111 million and the firm finances with only debt and common equity.

Hence, BVE + BVD = $ 111 million

Hence, BVD = 111 – 47.15 = $ 63.85 million

Hence, debt to equity ratio = BVD / BVE = 63.85 / 47.15 = 1.3542

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