Question

Suppose the School Company has this book value balance sheet: Current assets $30,000,000 Current liabilities $20,000,000 Fixed assets 70,000,000 Notes payable $10,000,000 Long-term debt 30,000,000 Common stock (1 million shares) 1,000,000 Retained earnings 39,000,000 Total assets $100,000,000 Total liabilities and equity $100,000,000 The notes payable are to banks, and the interest rate on this debt is 7%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company's permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 9%, and a 25-year maturity. The going rate of interest on new long-term debt, rd, is 12%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $52 per share. Calculate the firm's market value capital structure. Do not round intermediate calculations. Round your answers to two decimal places.

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =25

Bond Price =∑ [(9*1000/100)/(1 + 12/100)^k]     +   1000/(1 + 12/100)^25

k=1

Bond Price = 764.71

MV of Long term debt = price*number of debt = 764.71*30000=22941300

Total debt = MV of long term debt+notes payable = 22941300+10000000=32941300

Total Capital value = Value of Debt + Value of Equity

=32941300+52000000

=84941300

Weight of Debt = Value of Debt/Total Capital Value

= 32941300/84941300

=0.3878 = 38.78%

Weight of Equity = Value of Equity/Total Capital Value

= 52000000/84941300

=0.6122 = 61.22%

MV of equity = shares*price = 52*1000000=52000000

MV of debt =