   Chapter 4, Problem 2P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

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?

Summary Introduction

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.

Explanation

Solution:

Given,

Total capital is $125 million. Calculated values, Total debt is$55 million.

Formula to calculate debt to capital ratio,

Debt to capital ratio=TotaldebtTotalcapital

Substitute $55 million for total debt (working note) and$125 million for total capital (given) in the above formula,

debt to capital ratio=$55million$125million=0.44

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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