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Problem 9-16 Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet:...

Problem 9-16
Market Value Capital Structure

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 11%, 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 7%, and a 20-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 $64 per share. Calculate the firm's market value capital structure. Do not round intermediate calculations. Round your answers to two decimal places.

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

Solutions

Expert Solution

The market value of notes payable would be the same as the interest rate is equal to the existing interest rate
We will have to calculate the market value of bonds
Market value of bonds is equal to present value of coupon payment and present value of par value
Face Value 1000
Coupon amount (1000*7%) 70
Number of payment 20
Yield to maturity 10%
Market value of bond 70*((1-(1+10%)^(-20))/10% + 1000/((1+10%)^20)
Market value of bond 70*8.513564 + 148.64363
Market value of bond $744.59
Number of bonds issued 30000
Total market value of bonds $22,337,792.65
Market capitalization of equity (1000000*64) 64000000
Firm's market value of capital structure
Short term debt $10,000,000.00 10.38% 10000000/96337792.65
Long term debt $22,337,792.65 23.19% 22337792.65/96337792.65
Common Equity $64,000,000.00 66.43% 64000000/96337792.65
Total capital $96,337,792.65 100.00%

jeff jeffy answered 1 year ago
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