(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?
2. (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?