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 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 9%, and a 15-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $66 per share. Calculate the firm's market valuecapital 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

Answer: Calculation of the firm's market value capital structure:

Market Value(in millions) Percentage Short term Debt      10.00 10.32% Long tern Debt (see below)      20.87 21.55% Equity      66.00 68.13% Market Value      96.87 Value of Long term Bond would be the PV of the interest of every period and the principal of $1000 after 20 years at 10% Interest paid per period = $1000*9% = 90 =PV(0.1,15,-60) =PV(0.1,15,0,-1000) $456.36 + $239.39 $695.76 SO the price for the bond is $695.76

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