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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 $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, rd, 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 $   %

Solutions

Expert Solution

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]


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