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
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 8%, 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 25-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 your answers to two decimal places.

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

Answer 1

Capital Components	Market Value	Weight of Capital Structure
Short-term debt	$10,000,000	10.66%
Long-term debt	$21,830,700	23.26%
Common equity	$62,000,000	66.08%
Total capital	$93,830,700	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 Market Value of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Par Value of the bond = $1,000

Annual Coupon Amount = $70 per year [$1,000 x 7%]

Yield to Maturity of the Bond = 10%

Remaining years to Maturity = 25 Years

The Market Value of the Bond = Present Value of annual Coupon Payments + Present Value of the Bond’s Par Value

= $70[PVIFA 10%, 25 Years] + $1,000[PVIF 10%, 25 Years]

= [$70 x 9.07704] + [$1,000 x 0.09230]

= $635.39 + $92.30

= $727.69 per Bond

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

= 30,000 Bonds x $727.69 per Bond

= $2,18,30,700

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 $62 per share

= $62,000,000

Total Market Value = $9,38,300,700

Weight of Capital Structure

Weight of Short-term debt = 10.66% [($100,00,000 / $9,38,300,700) x 100]

Long-term debt = 23.26% [($218,30,700 / $938,300,700) x 100]

Common equity = 66.08% [($620,00,000 / $938,300,700) x 100]