Question

A Company has the following book value balance sheet. Current assets=$10,000,000 Net fixed assets= 60,000000 Total...

A Company has the following book value balance sheet.

Current assets=$10,000,000

Net fixed assets= 60,000000

Total assets $70,000,000

Long-Term Debt = $40,000,000

Common stock (1.5 million shares) =1,500,000

Retained earnings= 28,500,000

Total claims $70,000,000

The long-term debt (bonds) have a $1,000 face value, and a coupon interest rate of 5 percent and mature in 15 years, interest is paid semi-annually. The going rate of interest (YTM) on equivalent debt is 10 percent. The common stock has a current market price of $50 per share. Calculate the firm’s market value capital structure.

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Answer #1
Type Capital (market value) % of total capital
Debt $        24,627,549 24.72%
Common stock $        75,000,000 75.28%
WACC $       99,627,549

Price of bonds is:

Calculator
Inputs:
FV       1,000.00
PMT             25.00
Rate (I/Y) 5%
Term N             30.00
Output:
PV (bond price)      615.6887

Capital structure is:

25% debt and 75% equity.

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