Question

In: Finance

Suppose the Schoof Company has this book value balance sheet: Current assets $30,000,000 Current liabilities $20,000,000...

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, rd, 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

Solutions

Expert Solution

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%

jeff jeffy answered 2 years ago
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