MJSProblem 9-16 Market Value Capital Structure Suppose the Schoof Company has th
ID: 2723289 • Letter: M
Question
MJSProblem 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 7%, and a 25-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 $80,000,000Explanation / Answer
Calculations $ % Short-term debt 1000000 (Current Liabilities) $1,000,000 1.40% ($1000000 / $71235290) Long-term dent Note 1 (30000 bonds * $607.843 per bond) $18,235,290 25.60% ($18235290 / $71235290) Common Equity = $52 per share * 1000000 shares $52,000,000 73.00% ($52000000 / $71235290) Total Capital $71,235,290 Note 1 Price of Bond = [C [1 - (1+r)^-t] / r] + [F / (1+r)^t] C - Coupon Payment - $70 r - YTM = 12% F - Face Value = $1000 t - Years = 25 = [70 * [1 - (1.12^-25)/0.12] + [1000 / 1.12^25] = 549.0197 + 58.8233 = 607.8430
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