Question

Problem 11-16
Market Value Capital Structure

Suppose the Schoof Company has this book value balance sheet:

Current assets		$30,000,000		Current liabilities		$10,000,000
				Notes payable		10,000,000
Fixed assets		50,000,000		Long-term debt		20,000,000
				Common stock
				(1 million shares)		1,000,000
				Retained earnings		39,000,000
Total assets		$80,000,000		Total claims		$80,000,000

The current liabilities consist entirely of notes payable 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 20-year maturity. The going rate of interest on new long-term debt, rd, is 10%, 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. Round your answers to two decimal places.

Short-term debt	?	$	?	%
Long-term debt	?	$	?	%
Common equity	?	$	?	%
Total capital	?	$	?	%

Answer 1

For Short term debt, Interest rate on short term debt is equal to current market rate. So, Market value of short term debt is equal to book value of debt.

So, Market Value of short term debt = $10,000,000

For Long term debt

Number of bond = 30,000

Par value = $1,000

Coupon Rate = 9%

Year Remains in maturity = 20 year

Yield to maturity = 10%

Current Market value of lonag term debt is calculated in excel and screen shot provided below:

Current Value of bond is $914.20.

Total Value of long term debt = 30,000 × $914.20

= $27,426,137.05

Total Market Value of long term debt is $27,426,137.05.

Market value of equity = 1,000,000 × $52

= $52,000,000

Market value of equity is $52,000,000.

Market value of total capital = $10,000,000 + $27,426,137.05 + $52,000,000

= $89,426,137.05

Market value of total capital is $89,426,137.05.

Now,

Market value weight of Short term debt = $10,000,000 / $89,426,137.05

= 11.18%

Market value of weight of long term debt = $27,426,137.05 / $89,426,137.05

= 30.67%

Market value weight of equity = $52,000,000 / $89,426,137.05

= 58.15%