Financial Rations

20 Oct No Comments


What weights should Jefferson use when computing the firm’s weighted average cost of capital

We should always prefer Market Value over Book Value

Weight of debt = (Short-term debt + Long-term debt)/Total Capital

= (1,221,000+11,927,000)/ 39,318,000 = 33.44%

Weight of Equity = Common Equity/ Total Capital

= 26,170,000/39,318,000 = 66.55%

Weights based on market value

Liabilities = 33.44%

Equity = 66.55%



  • Debt ratio =

= 0.75

Interest bearing debt ratio =

= =

= 0.5


Debt ratio =


= 33.33%

c) The bank will consider the book value of the firm as it helps in analyzing its ability to pay off the loan

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