(Calculating capital structure weights) Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. Ojai's balance sheet indicates that the firm has $51.22 million in total liabilities. Ojai has only $38.31 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% over its book value or $42.14 million. The book value of Ojai's common equity is $49.92 million but the market value of the equity is currently $100.16 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?