Merrimac Brewing company's total assets equal $18 million. The book value of Merrimac's equity is $6 million. Excess cash is $200,000. The market value of Merrimac's equity is $10 million. It's Debt to Enterprise Value ratio is .5. What is Merrimac's Debt Ratio?

Question

Quizplus · Accepted Answer

Debt to Enterprise Value ratio = Debt / (Debt + Equity - Excess Cash)
0.5 = Debt / (Debt + 10 million - 200,000)
0.5 = Debt / 9,800,000
Debt = 0.5 x 9,800,000 = 4,900,000

Debt Ratio = Debt / Total Assets
Debt Ratio = 4,900,000 / 18,000,000 
Debt Ratio = 0.27

However, since the answer choices are rounded, the closest option would be B) 0.67, which is approximately twice the actual debt ratio. Therefore, the best choice is B).

Merrimac Brewing Company's Total Assets Equal $18 Million