Question

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 9%, 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 6%, and a 20-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 $68 per share. Calculate the firm's market value capital structure. Do not round intermediate calculations. Round the monetary values to the nearest cent and percentage values to two decimal places.

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

Answer 1

The firm's market value capital structure

Capital Components	Market Value	Weight of Capital Structure
Short-term debt	$10,000,000	10.23%
Long-term debt	$19,783,800	20.23%
Common equity	$68,000,000	69.54%
Total capital	$83,783,800	100.00%

Market Value of each capital components

Market Value of Short-term debt

Market Value of Short-term debt = $10,000,000 (Value of Note Payables)

Market Value of Long-term debt

· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 6.00%]	PMT	60
Market Interest Rate or Yield to maturity on the Bond [10.00%]	1/Y	10
Maturity Period/Time to Maturity [20 Years]	N	20
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $659.46.

Market Value of Long-term debt = Number of long-term Bonds x Market Price per bond

= 30,000 Bonds x $659.46 per bond

= $19,783,800

Market Value of Common equity

Market Value of Common equity = Number of common shares outstanding x Market price per share

= 10,00,000 Common shares x $68.00 per share

= $68,000,000

Total Market Value = $97,783,800

Weight of Capital Structure

Weight of Short-term debt = 10.23% [($10,000,000 / $97,783,800] x 100

Long-term debt = 20.23% [($19,783,800 / $97,783,800] x 100

Common equity = 69.54% [($68,000,000 / $97,783,800] x 100