Module 6 Question 3 Webb Solutions, Inc. has the following financial structure: Accounts payable $500,000 Short-term debt $250,000 Current liabilities $750,000 Long-term debt $750,000 Shareholders' equity $500,000 Total $2,000,000. a. Compute Webb's debt ratio and interest-bearing debt ratio. b. If the market value of Webb's equity is $2,000,000 and the value of the firm's debt is equal to its book value, assuming excess cash is zero, what is the debt-to-enterprise-value ratio for Webb? c. If you were a bank loan officer who was analyzing whether or not to loan more money to Webb, which of the ratios calculated in parts a and b is most relevant to your analysis? a. What is Webb's debt ratio?
Module 6 Question 3 Webb Solutions, Inc. has the following financial structure: Accounts payable $500,000 Short-term debt $250,000 Current liabilities $750,000 Long-term debt $750,000 Shareholders' equity $500,000 Total $2,000,000. a. Compute Webb's debt ratio and interest-bearing debt ratio. b. If the market value of Webb's equity is $2,000,000 and the value of the firm's debt is equal to its book value, assuming excess cash is zero, what is the debt-to-enterprise-value ratio for Webb? c. If you were a bank loan officer who was analyzing whether or not to loan more money to Webb, which of the ratios calculated in parts a and b is most relevant to your analysis? a. What is Webb's debt ratio?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Module 6 Question 3
Webb Solutions, Inc. has the following financial structure:
Accounts payable $500,000
Short-term debt $250,000
Current liabilities $750,000
Long-term debt $750,000
Shareholders' equity $500,000
Total $2,000,000.
Short-term debt $250,000
Current liabilities $750,000
Long-term debt $750,000
Shareholders' equity $500,000
Total $2,000,000.
a. Compute Webb's debt ratio and interest-bearing debt ratio.
b. If the market value of Webb's equity is $2,000,000 and the value of the firm's debt is equal to its book value, assuming excess cash is zero, what is the debt-to-enterprise-value ratio for Webb?
c. If you were a bank loan officer who was analyzing whether or not to loan more money to Webb, which of the ratios calculated in parts a and b is most relevant to your analysis?
a. What is Webb's debt ratio?
Expert Solution
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The mathematical relationship between two variables is called a ratio. Most often, investors employed ratio analysis to evaluate a company's financial performance before making an investment decision.
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If you were a bank loan officer who was analyzing whether or not to loan more money to Webb, which of the ratios calculated in parts a and b is most relevant to your analysis? (Select the best choice below.)
Transcribed Image Text:(Related to Checkpoint 15.1) (Calculating debt ratio) Webb Solutions, Inc. has the following financial structure:
a. Compute Webb's debt ratio and interest-bearing debt ratio.
b. If the market value of Webb's equity is $2,000,000 and the value of the firm's debt is equal to its book value, assuming excess cash is zero, what is the
debt-to-enterprise-value ratio for Webb?
c. If you were a bank loan officer who was analyzing whether or not to loan more money to Webb, which of the ratios calculated in parts a and b is most relevant to
your analysis?
a. Webb's debt ratio is 75.0%. (Round to one decimal place.)
Webb's interest-bearing debt ratio is 50%. (Round to one decimal place.)
b. Webb's debt-to-enterprise-value ratio is 33.3%. (Round to one decimal place.)
c. If you were a bank loan officer who was analyzing whether or not to loan more money to Webb, which of the ratios calculated in parts a and b is most relevant to
your analysis? (Select the best choice below.)
A. None of these three ratios can measure Webb's ability to repay the loan.
B. The most relevant of the three debt-related ratios we have calculated is the second, the interest-bearing debt ratio.
C. The most relevant of the three debt-related ratios we have calculated is the third, the debt-to-enterprise-value ratio.
D. The most relevant of the three debt-related ratios we have calculated is the first, the debt ratio.
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