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 20-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 $68 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 deb t_______ ______

Common equity _______ ______

Total capital $ _______ _______ %

Answer 1

Capital Components	Market Value	Weight of Capital Structure
Short-term debt	$10,000,000	9.69%
Long-term debt	$25,221,900	24.43%
Common equity	$68,000,000	65.88%
Total capital	$103,221,900	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 9.00%]	PMT	90
Market Interest Rate or Yield to maturity on the Bond [11.00%]	1/Y	11
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 = $840.73

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

= 30,000 Bonds x $840.73 per bond

= $25,221,900

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 per share

= $68,000,000

Total Market Value = $103,221,900

Weight of Capital Structure

Weight of Short-term debt = 9.69% [($10,000,000 / $103,221,900) x 100]

Long-term debt = 24.43% [($25,221,900 / $103,221,900) x 100]

Common equity = 65.88% [($68,000,000 / $103,221,900) x 100]