A Company Had a Debt-To-Equity Ratio of 1

question 18

Essay

A company had a debt-to-equity ratio of 1.65 before issuing convertible bonds. This ratio included $450,000 in equity. The company issued convertible bonds. The value reported for the bonds on the balance sheet is $200,000 and the conversion rights are valued at $25,000.
Required:
After the issuance of the convertible bonds, what is the value of the debt-to-equity ratio?

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Definitions:

CAPM

The Capital Asset Pricing Model, a formula used to determine the expected return of an asset based on its beta and expected market returns, thus assessing its inherent risk and cost of capital.

Beta

A measure of a security's or portfolio's volatility, or systematic risk, in comparison to the market as a whole.

Risk-free Rate

The risk-free rate is the theoretical return on an investment with zero risk, often represented by the yield on short-term government securities.

CAPM

Capital Asset Pricing Model; a model that describes the relationship between systematic risk and expected return for assets.