Bartley Barstools has a market/book ratio equal to 1. Its stock price is $14 per share and it has...

Question:

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?

Capital Structure:

In finance, capital structure refers to the composition of debts versus equities in financing the firm's assets. In modern finance theory, a firm's capital structure is important to a firm's cost of capital and value.

Answer and Explanation:

Debt-to-capital ratio is 44%.

The market value of equity = price per share * number of shares = 14*5 million = 70 million.

Value of debt = total capital - value of equity = 125 million - 70 million = 55 million.

So debt-to-capital ratio = value of debt / value of capital = 55 / 125 = 44%.


Learn more about this topic:

Capital Structure & the Cost of Capital

from Finance 101: Principles of Finance

Chapter 15 / Lesson 1
8.6K

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