Financial Rations

20 Oct No Comments

1

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%

2

=

  • Debt ratio =

= 0.75

Interest bearing debt ratio =

= =

= 0.5

b)

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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