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PROBLEM 4-2: Debt to Capital Ratio Kaye’s Kitchenware has a market/book ratio equal to 1. Its...

PROBLEM 4-2: Debt to Capital Ratio

Kaye’s Kitchenware has a market/book ratio equal to 1. Its stock price is $12 per share and it has 4.8 million shares outstanding. The firm’s total capital (TIC) is $110 million, and it finances with only debt and common equity. What is its debt-to-capital ratio?

Hint:

  • Since the Market to Book (M/B) is 1 then Market Value of Equity (MVE) = Book Value of Equity (BVE). Think MVA formula.

What is its Market Value of Equity (MVE) - Think MVA?

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Answer #1

Here market value per stock = 12 per stock

Market value / book value of per stock = 1

Market value per stock = book value per stock = $ 12

Outstanding shares = 4,800,000 million shares

Market value of equity = 4,800,000 * 12 = $ 57,600,000

Total firm value = $ 110,000,000

Debt value = total value - equity value = $110,000,000 - 57,600,000 = $ 52,400,000

Debt to capital  ratio = debt / total capital value = 52,400,000 / 110,000,000 = 0.4763636364

Debt to capital ratio = 47.636364%

Debt to capital ratio = 47.64%

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