Problem 9-16 Market Value Capital Structure Suppose the Schoof Company has this

Question

Problem 9-16
Market Value Capital Structure

Suppose the Schoof Company has this book value balance sheet:

The current liabilities consist entirely of notes payable to banks, and the interest rate on this debt is 10%, 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 8%, 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 $58 per share. Calculate the firm's market value capital structure. Round your answers to two decimal places.

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

Explanation / Answer

Long term debt

coupon payment = 9%*1000= 90

Market value per share = 90/1.12 + 90/1.12^2 + 90/1.12^3......1090/1.12^25 = $764.71

Long term Debt = 30,000*764.71 =$22,941,174.80

Value of common equity = 56*1,000,000 =$56,000,000

Total capital= $22,941,174.80+10,000,000 +$56,000,000 =88,941,174.80

Short-term debt $10,000,000 =10,000,000/88,941,174.80 = 11.24%

Long term Debt $22,941,174.80 =$22,941,174.80/88,941,174.80 = 25.80%

common equity   $56,000,000 =$56,000,000/88,941,174.80 =62.96%

Total Capital $88,941,174.80 =100%

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