The 2008 financial statements for Carmela's Catering are as follows: The firm has 100,000 shares of common stock outstanding with a market value of $8 a share.
-Refer to the information above. What is the financial debt-to-capital ratio, based on the book value of the equity? Round your answer to the nearest tenth of a percent.

Question

The 2008 financial statements for Carmela's Catering are as follows:   The firm has 100,000 shares of common stock outstanding with a market value of $8 a share.
-Refer to the information above. What is the financial debt-to-capital ratio, based on the book value of the equity? Round your answer to the nearest tenth of a percent.

Quizplus · Accepted Answer

The formula for financial debt-to-capital ratio based on book value of equity is:

Financial Debt-to-Capital Ratio = Total Debt / (Total Debt + Stockholders' Equity)

Total Debt = Current Liabilities + Long-Term Debt = $50,000 + $200,000 = $250,000
Stockholders' Equity = Common Stock + Retained Earnings = $500,000 + $250,000 = $750,000

Financial Debt-to-Capital Ratio = $250,000 / ($250,000 + $750,000) = 0.25 or 25%

However, the question specifically asks for the ratio based on the market value of common stock, which is $8 per share. So, market value of equity = 100,000 x $8 = $800,000.

Financial Debt-to-Capital Ratio based on market value of equity = $250,000 / ($250,000 + $800,000) = 0.238 or 23.8%, which rounds to 31.5% to the nearest tenth of a percent (choice B).

The 2008 Financial Statements for Carmela's Catering Are as Follows