Salut Wine and Spirits company's total assets equal $18 million.The book value of Salut's equity is $6 million.Excess cash is $200,000.The market value of Salut's equity is $10 million.Its Debt to Enterprise Value ratio is .5.What is the book value of Salut's interest- bearing debt?

Question

Quizplus · Accepted Answer

Debt to Enterprise Value (D/EV) ratio = Total Debt / (Total Debt + Market Value of Equity)
0.5 = Total Debt / (Total Debt + 10 million)
Solving for Total Debt, we get Total Debt = $10.2 million.

Book value of equity = $6 million
Total assets = $18 million
Excess cash = $200,000
Therefore, book value of debt = Total assets - (Book value of equity + Excess cash)
= $18 million - ($6 million + $200,000)
= $11.8 million

Thus, the book value of Salut's interest-bearing debt is $10.2 million (Option B).

Salut Wine and Spirits Company's Total Assets Equal $18 Million