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 debtâ€"equity ratio?.

Answer 1

Frusciante, Inc.'s market value debt-equity ratio is 1.35.

Data and Calculations:

Outstanding bonds = 290,000

Bonds par value = $1,000

Outstanding bonds value = $290,000,000 (290,000 x$1,000)

Coupon interest rate = 7%

Maturity period = 8 years

Current YTM = 7.5%

Market price per bond = $1,071 ($1,000 x 7.5%/7%)

Market price of bonds = $310,590,000 ($1,071 x 290,000)

Outstanding common stock = 10 million shares

Market price per share = $23

Market value of common stock = $230 million ($23 x 10,000,000)

Market value debt-equity ratio = 1.35 ($310,590,000/$230,000,000)

Thus, Frusciante, Inc.'s market value debt-equity ratio is 1.35.

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