Module 6 Question 4 (Calculating capital structure weights) Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. Ojai's balance sheet indicates that the firm has $51.82 million in total liabilities. Ojai has only $38.88 million in short- and long-term debt on its balance sheet. However, because interest rates have fallen dramatically since the debt was issued, Ojai's short- and long-term debt has a current market price that is 10 percent over its book value or $42.77 million. The book value of Ojai's common equity is $50.57 million but the market value of the equity is currently $101.07 million. a. What is Ojai's debt ratio and interest-bearing debt ratio calculated using book values? b. What is Ojai's debt-to-enterprise-value ratio calculated using the market values of the firm's debt and equity and assuming excess cash is zero? c. If you were trying to describe Ojai's capital structure to a potential lender (i.e., a bank), would you use the book-value-based debt ratio or the market-value-based debt-to-enterprise-value ratio?
Module 6 Question 4 (Calculating capital structure weights) Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. Ojai's balance sheet indicates that the firm has $51.82 million in total liabilities. Ojai has only $38.88 million in short- and long-term debt on its balance sheet. However, because interest rates have fallen dramatically since the debt was issued, Ojai's short- and long-term debt has a current market price that is 10 percent over its book value or $42.77 million. The book value of Ojai's common equity is $50.57 million but the market value of the equity is currently $101.07 million. a. What is Ojai's debt ratio and interest-bearing debt ratio calculated using book values? b. What is Ojai's debt-to-enterprise-value ratio calculated using the market values of the firm's debt and equity and assuming excess cash is zero? c. If you were trying to describe Ojai's capital structure to a potential lender (i.e., a bank), would you use the book-value-based debt ratio or the market-value-based debt-to-enterprise-value ratio?
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 7P
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Module 6 Question 4 (Calculating capital structure weights) Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. Ojai's balance sheet indicates that the firm has $51.82 million in total liabilities. Ojai has only $38.88 million in short- and long-term debt on its balance sheet. However, because interest rates have fallen dramatically since the debt was issued, Ojai's short- and long-term debt has a current market price that is 10 percent over its book value or $42.77 million. The book value of Ojai's common equity is $50.57 million but the market value of the equity is currently $101.07 million.
a. What is Ojai's debt ratio and interest-bearing debt ratio calculated using book values?
b. What is Ojai's debt-to-enterprise-value ratio calculated using the market values of the firm's debt and equity and assuming excess cash is zero?
c. If you were trying to describe Ojai's capital structure to a potential lender (i.e., a bank), would you use the book-value-based debt ratio or the market-value-based debt-to-enterprise-value ratio?
Expert Solution
Step 1
Debt -ratio
A debt ratio calculates a company's leverage by comparing its total debt to its assets.
Since this ratio varies greatly between industries, capital-intensive enterprises typically have significantly larger debt ratios than other businesses.
Divide total debt by total assets to find a company's debt ratio.
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