Question

Edgehill, Inc. has 320,000 bonds outstanding. The bonds have a par value of $1,000, a coupon rate of 5.8 percent paid semiannually, and 12 years to maturity. The current YTM on the bonds is 6.3 percent. The company also has 9.5 million shares of stock outstanding, with a market price of $23 per share. What is the company's market value debt-equity ratio? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

Answer 1

The market value debt-equity ratio of Edgehill, Inc. is calculated by dividing the total par value of the bonds by the market value of the equity, resulting in a ratio of 1.464 (rounded to three decimal places).

Step-by-step explanation:

The company's market value debt-equity ratio is calculated by dividing the market value of the company's debt by the market value of its equity. First, we calculate the market value of the debt by considering the total number of bonds outstanding and their par value. Since each bond has a par value of $1,000 and there are 320,000 bonds, the total par value of the debt is 320,000 * $1,000 = $320,000,000.

Next, we find the market value of equity by multiplying the number of shares outstanding by the market price per share, which gives us 9.5 million * $23 = $218,500,000.

Now we divide the total par value of the bonds by the market value of the equity to get the market value debt-equity ratio: $320,000,000 / $218,500,000 = 1.464 (rounded to three decimal places).