Market Value Capital Structure Suppose the Schoof Company has this book value ba

Question

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 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 9%, and a 15-year maturity. The going rate of interest on new long-term debt, rd, is 12%, 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.

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

If the retained earning distributed as dividend, EPS=39000000/1000000 39 Cost of Equity=EPS/P=39/52 0.75 Value of Common Equity=100000/0.75(A) 133333.33 Value of short term debt=Debt/Cost=10000000/0.11(B) 90909090.91 Value of long term debt=Debt/Yield=30000000/0.12

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