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
				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 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 $62 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

This company's capital structure consists of short term, long term debts and common equity

Short term debt which is permanent in the capital structure is Notes payable=$10,000,000

The long term debt consists bonds. so we have to find the market price of bond using PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

rate=yield to maturity=10%

nper=maturity period=20

pmt=coupon payment=(6%*1000)=60

fv=1000

=PV(10%,20,60,1000,0)

PV=659.46

Market value of Long term debt=Total number of bonds*price of the bond=30,000*659.46=$19,783,724

Market value of the common equity=total number of shares*current share price=1,000,000*62=$62,000,000

Total market value of capital structure= Market value of short term debt+ Market value of long term debt + Market value of common equity=$10,000,000+$19,783,724+$62,000,000=$91,783,724

In percentage terms,

weight of short term debt=10,000,000/91,783,724=10.90%

weight of long term debt=19,783,724/91,783,724=21.55%

Weight of common equity=62000000/91,783,724=67.55%