1. (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:
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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?