In: Finance
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 $ %
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]