Examine the following book-value balance sheet for University Products, Inc. The

Question

Examine the following book-value balance sheet for University Products, Inc. The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are 1 million common shares outstanding. BOOK VALUE BALANCE SHEET (all values in millions) Assets Liabilities and Net Worth Cash and short-term securities $ 1.0 Bonds, coupon = 8%, paid annually (maturity = 10 years, current yield to maturity = 9%) $ 10.0 Accounts receivable 3.0 Preferred stock (par value $20 per share) 2.0 Inventories 7.0 Common stock (par value $.10) .1 Plant and equipment 21.0 Additional paid-in stockholders

Explanation / Answer

I will assume that all values in the table are in millions. -First find debt's market value: Market value of debt = PV of future payments (coupons and principal) discounted at cost of debt (the yield to maturity) Coupon payments = 0.08 * $10 million = $0.8 million PV of Coupons: PV = C/(1+R) + C/(1+R)^2 + ... + C/(1+R)^10 = = (C/R) * [(1 - (1 / (1 + R)^10))] = = (0.8 / 0.09) * [(1 - (1 / (1.09)^10))] = = 8.888 * 0.5776 = = $5.134 million PV of principal: PV = P / (1 + R)^10 = = $10 million / (1.09)^10 = = $4.224 million Market value of debt = PV of Coupons + PV of principal = = $5.134 million + $4.224 million = = $9.36 million -Market value of preferred stock: We have $2.0 million in preferred stocks at a par value of $20, this means that we have (2.0 million / 20 =) 100,000 shares of preferred stock. If the current market value of each share of prefered stock is $15 we have that: Market value of preferred stock = 100,000 shares * $15 = = $1.5 million -Market value of common stock: There are one million common shares outstanding. If the current market value of each share of common stock is $20 we have that: Market value of common stock = 1,000,000 shares * $20 = = $20 million The Capital Structure for University Products, Inc. based on market value is: Market value of debt_________ $9.36 million -----> 30.33% Market value of preferredstock__ $1.5 million -----> 4.86% Market value of common stock__ $20.0 million -----> 64.81% --------------------- Total market value of firm______ $30.86 million

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.