Question

(Related to Checkpoint​ 15.1)  ​(Calculating capital structure​ weights)  Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. ​ Ojai's balance sheet indicates that the firm has ​$48.26 million in total liabilities. Ojai has only ​$40.15 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 ​$44.17 million. The book value of​ Ojai's common equity is ​$49.77 million but the market value of the equity is currently ​$99.72 million.

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?

Answer 1