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?