In Financial Management by Brigham and Ehrhardt, the answer for problem 9-16 giv

Question

In Financial Management by Brigham and Ehrhardt, the answer for problem 9-16 given in the back of the book reflects a short-term debt of 11.14%, a long-term debt of 22.03%, and a common equity of 66.83%, however the solution shown for this problem is completely different. How do you calculate these percentages using a financial calculator?

c. Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC?No numbers are required to answer this question. Suppose the Schoof Company has this book value balance sheet: (9-16) Market Value Capital Structure Current assets $ 30,000,000 Fixed assets 70,000,000 Current liabilities $ 20,000,000 Notes payable $ 10,000,000 Long-term debt 30,000,000 Common stock (1 million shares). 1,000,000 Retained earnings 39,000,000 Total liabilities and equity $100,000,000 Total assets $100,000,000 The notes payable are 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 6%, and a 20-year maturity. The going rate of interest on new long-term debt, ras is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $60 per share. Calculate the firm's market value capital structure. The table below gives the balance sheet for Travellers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains. Travellers Inn: December 31, 2013 (Millions of Dollars) Cash $ 10 Accounts payable $ 10 (9-17) WACC Estimation

Explanation / Answer

I think the answer is not correct while calculating market value capital structure we use market value of all the components of financing.

Here it consists of:

1. (Notes payable) Short term debt = 10,00,000$ because this is a short term bank financing whose value generally don't get changed. The interest rate is 10% which gets paid by bank whenever it becomes due, most probably annually.

2. Long term debt is 30,000 bonds 1000 par value, but the YTm us more than coupon rate, it implies that bond is trading at a discount, therefore we need to find the present value of bond by using financial calculator Texas BA 2 plus.

PMT= 60 $ for a year, FV= 1000$, I/Y= 10%, N= 20 years.

PV= 659.42 $

Market value of bonds(long term debt) = 659.42* 30000= 19782600$

Market value of shares= 60* 1000000= 60,000,000$

Total market value of capital structure= 1000000+ 19782600+ 60000000= 89782600$

Weights of components:

Short term Debt= 10/89.7826*100= 11.14%

Long term Debt= 19.7826/89.7826*100= 22.03%

Common Stock= 60/89.7826*100= 66.83%

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