Question

Suppose the Schoof Company has this book value balance sheet:

Current assets		$30,000,000		Current liabilities		$20,000,000
				Notes payable		10,000,000
Fixed assets		70,000,000		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 10%, 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, r_d, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $70 per share. Calculate the firm's market value capital structure. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places.

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

Answer 1

First calculate the price of the bond as follows:

so, Price of the bond is $909.23.

Now, calculate market value of Long term debt as follows:

Market value of Long term debt = No. of bonds * Price of a bond

= 30,000 * 909.23

= 27,276,900

Market value of Short term debt is the value of Notes payables = 10,000,000.

Calculate market Capitalization as follows:

Market capitalization = No. of shares * Price of the share.

= 1000,000 * 70

= 70,000,000

Calcualate total market value of capital structure as follows:

Total market value of capital structure =  Market value of Long term debt + Market value of Short term debt + Market capitalization

= 27,276,900 + 10,000,000 + 70,000,000

= 107,276,900

Long term debt (%) = Long term debt / Total market value of capital structure * 100

= 27,276,900 / 107,276,900 *100

= 25.426%

Short term debt (%) = Short term debt / Total market value of capital structure * 100

= 10,000,000 / 107,276,900 *100

= 9.32%

Equity(%) = Equity / Total market value of capital structure * 100

= 70,000,000 / 107,276,900 *100

= 65.25%