Question

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 7%, 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 12%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $58 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	11.52%
Long-term debt	$18,795,900	21.66%
Common equity	$58,000,000	66.82%
Total capital	$86,795,900	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 = 12%

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 12%, 20 Years] + $1,000[PVIF 12%, 20 Years]

= [$70 7.46944] + [$1,000 x 0.10367]

= $522.86 + $103.67

= $626.53 per bond

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

= 30,000 Bonds x $626.53 per bond

= $18,795,900

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 $58 per share

= $58,000,000

Total Market Value = $86,795,900

Weight of Capital Structure

Weight of Short-term debt = 11.52% [($100,00,000 / $86,795,900) x 100]

Long-term debt = 21.66% [($187,95,900 / $86,795,900) x 100]

Common equity = 66.82% [($580,00,000 / $86,795,900) x 100]