Capital Structure. Here is a simplified balance sheet for Epicure Pizza (figures

Question

Capital Structure. Here is a simplified balance sheet for Epicure Pizza (figures in $MM) Current assets 80 Fixed assets 125 Total 205 Current Liabilities 60 Long term debt 65 Equity 80 Total 205 Note: There are 16 million shares outstanding. Epicure shares are currently priced at $12 each. a. You wish to calculate Epicure's WACC. What is the relevant debt figure for the company's debt ratio? b. You now realize that since Epicure issued its debt, interest rates have fallen substantially. Do you need to revise your measure of the debt ratio upward or downward?

Explanation / Answer

a)

Using Market Value , Assuming Debt showing in books is equivalent to Market

Company's debt ratio = Long term Debt/(Long Term Debt + Equity)

Company's debt ratio = 65/(65+16*12)

Company's debt ratio = 25.29%

b)

If Interest Rate have fallen substantially, than Debt portion would rise

you need to revise your measure of the debt ratio upward

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