Question

Jenkins, Inc., has equity with a market value of $23.9 million and debt with a market value of $7.17 million. The cost of debt is 9 percent per year. Treasury bills that mature in one year yield 5 percent per year, and the expected return on the market portfolio over the next year is 12 percent. The beta of the company’s equity is 1.24. The firm pays no taxes. a. What is the company’s debt-equity ratio?

Answer 1

The debt-equity ratio of Jenkins, Inc. is 0.3 or 30%.

Step-by-step explanation:

The debt-equity ratio of Jenkins, Inc. can be calculated by dividing the market value of the company's debt by the market value of its equity.

Given:

• Market value of equity = $23.9 million
• Market value of debt = $7.17 million

To calculate the debt-equity ratio:

Debt-equity ratio = Market value of debt / Market value of equity

Debt-equity ratio = $7.17 million / $23.9 million

Debt-equity ratio = 0.3 or 30%

The debt-equity ratio of Jenkins, Inc. is calculated by dividing the market value of its debt ($7.17 million) by the market value of its equity ($23.9 million), which results in a ratio of approximately 0.3.