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Harrison, Inc., has the following book value balance sheet: |
| Assets | Total Debt and Equity | |||||
| Current assets | $ | 175,000,000 | Total debt | $ | 236,000,000 | |
| Equity | ||||||
| Common stock | $ | 45,000,000 | ||||
| Capital surplus | 84,000,000 | |||||
| Net fixed assets | 345,000,000 | Accumulated retained earnings | 155,000,000 | |||
| Total shareholders' equity | $ | 284,000,000 | ||||
| Total assets | $ | 520,000,000 | Total debt and shareholders' equity | $ | 520,000,000 | |
| a. |
What is the debt-equity ratio based on book values? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) |
| b. | Suppose the market value of the company's debt is $237.2 million and the market value of equity is $720 million. What is the debt-equity ratio based on market values? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) |
Question a:
Book value of Debt = $236,000,000
Book Value orf Equity = $284,000,000
Debt Equity ratio based on book values = Book Value of Debt / Book Value of Equity
= $236,000,000 / $284,000,000
= 0.830985915
Therefore, Debt equity ratio based on book values is 0.831
Question b:
Market value of Debt = $237,200,000
Market Value orf Equity = $720,000,000
Debt Equity ratio based on Market values = Market Value of Debt / Market Value of Equity
= $237,200,000 / $720,000,000
= 0.329444444
Therefore, Debt equity ratio based on market values is 0.329
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