On December 31st, 2005, the book value of Luther Corp’s equity is $63.6 million and debt is $205.8 million. On December 31st, 2006, the book value of equity is $126.6 million and a book value of debt is $290.1 million. Additionally, on Dec 31st, 2006 Luther Corp had 10.2 million shares outstanding and these shares are trading at $16 per share. Further on Dec 31st, 2005 the company had 8 million shares outstanding and they were trading at $15 per share. Using this data, answer the questions below.
1. What is Luther’s market-to-book ratio on Dec 31st, 2005? What is this ratio on Dec 31st, 2006? What potential reasons can explain the change in this ratio for Luther Corp?
2. When using the book value of equity, what is the debt ratio for Luther on Dec 31st, 2006? Using the market value of equity, what is the debt ratio?
3. What are the reasons to calculate debt ratios based on both book value and market value of equity when evaluating a firm’s solvency? Get Finance Help Today
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