Question

Suppose the Schoof Company has this book value balance sheet:

Current Assets: $30,000,000                          Current Liabilities: $20,000,000

Fixed Assets: $70,000,000                              Notes Payable: $10,000,000

Total Assets: $100,000,000                             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

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 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.

Answer 1

Step 1: Find the price of the long term bonds

FV= 1000

Coupon= 6% * 1000= $60

YTM=RATE=10%

N=20

Price is computed using the PV formula in excel as =PV(10%,20,60,1000)

Price= $659.46

Step 2:

Market Value of Capital

The market value of ST debt = $10,000,000

The market value of LT debt = $19,783,724

($659.46* 30000)

The market capitilisation = $ 60,000,000

(1000,000 shares * $60)

Total $89,783,723.54

The percentage break Up is

Equity = 66.83% (60000,000/ Total)

LT Debt= 22.03% (19783,724/ Total)

ST Debt= 11.14% (10000,000/ Total)