Use the table for the question(s)below.
Consider the following balance sheet:

-Luther Corporation's share price is $39 and the company has 20 million shares outstanding. Its Market value Debt-Equity Ratio for 2012 is closest to:
A)2.29
B)0.37
C)1.89
D)0.31

Question

Use the table for the question(s)below.
Consider the following balance sheet:
  
-Luther Corporation's share price is $39 and the company has 20 million shares outstanding. Its Market value Debt-Equity Ratio for 2012 is closest to:
A)2.29 
B)0.37 
C)1.89 
D)0.31

Quizplus · Accepted Answer

The Market value Debt-Equity Ratio can be calculated by dividing the market value of debt by the market value of equity.

Market value of equity = Share price x Number of shares outstanding = $39 x 20 million = $780 million

To calculate the market value of debt, we need to use the information from the table. The table shows that the Total liabilities and Shareholders' equity = $1,720 million.

Now, we need to subtract the Shareholders' equity from the Total liabilities and Shareholders' equity to get the Total liabilities:

Total liabilities = Total liabilities and Shareholders' equity - Shareholders' equity = $1,720 million - $760 million = $960 million

Since the Market value Debt-Equity Ratio = Total liabilities / Market value of equity, we can substitute the values we just calculated to get:

Market value Debt-Equity Ratio = $960 million / $780 million = 1.23

Therefore, the closest answer is B) 0.37.

Use the Table for the Question(s)below