Question

Market Value Capital Structure

Suppose the Schoof 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 8%, 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 7%, and a 15-year maturity. The going rate of interest on new long-term debt, rd, is 11%, 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

Solution:
	The firm's market value capital structure
	The market value of ST debt	$10,000,000.00
	The market value of LT debt	$21,370,956.52
	The market capitalization of Equity	$52,000,000.00
	Total market value of capital structure	$83,370,956.52
Working Notes:
1st	The market value of ST debt = Notes Payable to bank = $10,000,000
2nd	The market value of LT debt = No of bonds x Bond price
	(is bond market value)	=30,000 x $712.3652173
		=$21,370,956.519
		=$21,370,956.52
Notes:
	Bond Price = Periodic Coupon Payments x Cumulative PVF @ periodic YTM (for t= to t=n) + PVF for t=n @ periodic YTM x Face value of Bond
	Coupon Rate = 7%
	Annual coupon = Face value of bond x Coupon Rate = 1,000 x 7% = $70
	YTM= 11% p.a (annual)
	n= no.of coupon = No. Of years x no. Of coupon in a year
	= 15 x 1 = 15
	Bond Price = Periodic Coupon Payments x Cumulative PVF @ periodic YTM (for t= to t=n) + PVF for t=n @ periodic YTM x Face value of Bond
	=$70 x Cumulative PVF @11% for 1 to 15th+ PVF @11% for 15th period x 1,000
	=70 x 7.190869576   + 1000 x 0.209004347
	=$712.3652173
	Cumulative PVF @ 11 % for 1 to 15th is calculated = (1 - (1/(1 + 0.11)^15) ) /0.11 = 7.190869576
	PVF @ 11% for 15th period is calculated by = 1/(1+i)^n = 1/(1.11)^15 =0.209004347
3rd	The market capitalization of Equity = Current price of share x total no of shares outstanding
		=$52 x 1,000,000
		=$52,000,000
Please feel free to ask if anything about above solution in comment section of the question.