06 May FINANCES: WEIGHTS/RATIOS
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?
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