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?
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%.
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Learn more about this topic:
from Finance 101: Principles of FinanceChapter 15 / Lesson 1
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