Assignment:
Q1. (Defining capital structure weights) In August of 2015 the capital structure of the Jefferson Corporation (measured in book and market values) appeared as follows:
(Thousands of dollars) Book Values Market Values
Short-term debt $ 1,221,000 $ 1,221,000
Long-term debt 11,927,000 11,927,000
Common equity 9,113,000 26,170,000
Total capital $22,261,000 $39,318,000
What weights should Emerson use when computing the firm's weighted average cost of capital?
Q2. (Calculating debt ratio) Fast Solutions, Inc. has the following financial structure:
Accounts payable $ 500,000
Short-term debt 250,000
Current liabilities $ 750,000
Long-term debt 750,000
Shareholders' equity 500,000
Total $2,000,000
• Compute Fast's debt ratio and interest-bearing debt ratio.
• If the market value of Fast's equity is $2,000,000 and the value of the firm's debt is equal to its book value, assuming excess cash is zero, what is the debt-to-enterprise-value ratio for Fast?
• If you were a bank loan officer who was analyzing whether or not to loan more money to Fast, which of the ratios calculated in parts A and B is most relevant to your analysis? Why?