Question

Frusciante, Inc., has 290,000 bonds outstanding. The bonds have a par value of $1,000, a coupon rate of 7 percent paid semiannually, and 8 years to maturity. The current YTM on the bonds is 7.5 percent. The company also has 10 million shares of stock outstanding, with a market price of $23 per share. What is the company’s market value debt–equity ratio?

Answer 1

The market value debt-equity ratio of Frusciante, Inc. is calculated by dividing the total market value of its debt ($290,000,000) by the total market value of its equity ($230,000,000), resulting in a ratio of approximately 1.26.

Step-by-step explanation:

The company's market value debt-equity ratio can be calculated by comparing the market value of its debt to the market value of its equity. First, we need to calculate the market value of the debt. Although the current Yield to Maturity (YTM) is given as 7.5%, what we actually need is the total market value of the bonds, which is the number of bonds multiplied by their par value since YTM does not affect this calculation as it relates to price rather than the nominal value. So, the market value of the debt is 290,000 bonds × $1,000 par value = $290,000,000.

Next, we calculate the market value of the equity which is the number of shares outstanding times the market price per share: 10,000,000 shares × $23 market price per share = $230,000,000. Finally, to get the market value debt-equity ratio, divide the market value of the debt by the market value of the equity:

Market Value Debt-Equity Ratio = $290,000,000 / $230,000,000 ≈ 1.26.

Therefore, the company's market value debt-equity ratio is approximately 1.26.