Complete the homework assignment in Microsoft Word or Excel. Clearly label and organize each problem and show your work.
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:
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?