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In: Finance

Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: Current assets...

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 15-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 $68 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

Capital Components

Market Value

Weight of Capital Structure

Short-term debt

$10,000,000

9.89%

Long-term debt

$23,154,600

22.89%

Common equity

$68,000,000

67.22%

Total capital

$101,154,600

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 = 15 Years

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

= $70[PVIFA 10%, 15 Years] + $1,000[PVIF 10%, 15 Years]

= [$70 x 7.60608] + [$1,000 x 0.23939]

= $532.43 + $239.39

= $771.82 per bond

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

= 30,000 Bonds x $771.82 per bond

= $23,154,600

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 = $101,154,600

Weight of Capital Structure

Weight of Short-term debt = 9.89% [($10,000,000 / $101,154,600) x 100]

Long-term debt = 22.89% [($23,154,600 / $101,154,600) x 100]

Common equity = 67.22% [($68,000,000 / $101,154,600) x 100]


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