A firm has a debt-equity ratio 0.65.if the current value of the firm's equity capital is 40m, determine
(a) the current value of its debt
Given that total capital=debt+equity
To determine the current value of the firm's debt, we need to know the total capital of the firm. However, the question only provides the current value of the firm's equity capital, which is 40 million. To proceed, we need to calculate the total capital first.
The total capital of a firm is the sum of its debt and equity. We can express this relationship using the formula:
Total Capital = Debt + Equity
Since we are given the equity capital, we can rearrange the equation to solve for the debt:
Debt = Total Capital - Equity
Now, let's substitute the given information into the equation. We know that the debt-equity ratio is 0.65, which means that the debt is 65% of the equity (or 0.65 times the equity).
Debt = (0.65 * Equity)
Debt = (0.65 * 40 million)
Debt = 26 million
Therefore, the current value of the firm's debt is 26 million.