Question

Market Value Capital Structure

Suppose the Schoof Company has this book value balance sheet:

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

The current liabilities consist entirely of notes payable to banks, and the interest rate on this debt is 11%, 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 15-year maturity. The going rate of interest on new long-term debt, r_d, 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 value capital structure. Round your answers to two decimal places.

Short-term debt		$		%
Long-term debt		$		%
Common equity		$		%
Total capital		$		%

Answer 1

1. Value of Long Term debt = 30000 * (Coupon * PVAF ( 0.10, 15) + Maturity * PVF ( 0.10,15))

Value of Long Term debt = 30000 * (60 * 7.6061 + 1000 * 0.2394)

Value of Long Term debt = 30000 * (695.76)

Value of Long Term debt = $20872704.59

Value of Equity = $66 * 1000000 = $66000000