Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. Ojais balance sheet indicates that the
Question:
Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. Ojai’s balance sheet indicates that the firm has $50 million in total liabilities. Ojai has only $40 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 million. The book value of Ojai’s common equity is $50 million but the market value of the equity is currently $100 million.
a. What are 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? Why?
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
Step by Step Answer:
A We can calculate Ojais debt ratio using equation 151 Debt ratio Ojais balance sheet has 50000000 in total liabilities and 50000000 in total equity I...View the full answer
Financial Management Principles and Applications
ISBN: 978-0133423822
12th edition
Authors: Sheridan Titman, Arthur Keown, John Martin
