Compute fast debt ratio-interest-bearing debt ratio

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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?

Reference no: EM131725591

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