(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

$51.43

million in total liabilities. Ojai has only

$41.63

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

$45.79

million. The book value of Ojai's common equity is

$48.78

million but the market value of the equity is currently

$99.69

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?