Question

Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. ​ Ojai's balance sheet indicates that the firm has $51.75 million in total liabilities. Ojai has only ​$40.09 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 $44.10million. The book value of​ Ojai's common equity is $49.09 million but the market value of the equity is currently $99.86 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?

Answer 1