Question

Problem 9-16
Market Value Capital Structure

Suppose the Schoof Company has this book value balance sheet:

Current assets		$30,000,000		Current liabilities		$10,000,000
Fixed assets		50,000,000		Long-term debt		30,000,000
				Common stock
				(1 million shares)		1,000,000
				Retained earnings		39,000,000
Total assets		$80,000,000		Total claims		$80,000,000

The current liabilities consist entirely of notes payable 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 20-year maturity. The going rate of interest on new long-term debt, r_d, is 11%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $52 per share. Calculate the firm's market value capital structure. 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	12.13%
Long-term debt	$20,444,100	24.80%
Common equity	$52,000,000	63.07%
Total capital	82,444,100	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 = 11%

Remaining years to Maturity = 20 Years

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

= $70[PVIFA 11%, 20 Years] + $1,000[PVIF 11%, 20 Years]

= [$70 x 7.96333] + [$1,000 x 0.12403]

= $557.44 + $124.03

= $681.47 per bond

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

= 30,000 Bonds x $681.47 per bond

= $20,444,100

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 $52 per share

= $52,000,000

Total Market Value = $82,444,100

Weight of Capital Structure

Weight of Short-term debt = 12.13% [($100,00,000 / $824,44,100) x 100]

Long-term debt = 24.80% [($204,44,100 / $824,44,100) x 100]

Common equity = 63.07% [($5,20,00,000 / $824,44,100) x 100]