Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
DEBT TO CAPITAL RATIO Bartley Barstools has a market/book ratio equal to 1. Its stock price is $14 per share and it has 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?
To determine: Debt to capital ratio.
Debt to Capital Ratio: It represents the proportion of debt capital in firm’s total capital. Debt to capital ratio is determined by dividing total debt to total capital.
Solution:
Given,
Total capital is $125 million.
Calculated values,
Total debt is $55 million.
Formula to calculate debt to capital ratio,
Substitute $55 million for total debt (working note) and $125 million for total capital (given) in the above formula,
Here, debt to capital ratio is 0.44 or 44%.
Working note:
Given,
Numbers of outstanding shares are 5million.
Stock price per share is $14
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