Question

Suppose the Schoof Company has this book value balance sheet: Current assets $30,000,000 Current liabilities $20,000,000 Notes payable 10,000,000 Fixed assets 70,000,000 Long-term debt 30,000,000 Common stock (1 million shares) 1,000,000 Retained earnings 39,000,000 Total assets $100,000,000 Total liabilities and equity $100,000,000 The notes payable are 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 8%, and a 25-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 $64 per share. Calculate the firm's market value capital structure. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places. Short-term debt $ % Long-term debt Common equity Total capital $ %

Answer 1

Market value of Notes payable=$10,000,000

for long term bonds, we need to calculate the price of the bond using PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

rate=10%

nper=number years to maturity=25

pmt=coupon payment=(8%*1000)=80

fv=1000

=PV(10%,25,80,1000,0)

PV=$818.46

Market value of long term debt=Number of bonds*price of each bond=30,000*818.46=$24,553,776

Market value of the equity=shares*price=1,000,000*64=$64,000,000

Total market value=$10,000,000+$24,553,776+$64,000,000=$98,553,776

Weight of Notes payables in Total Capital structure(%)=$10,000,000/$98,553,776=10.15%

Weight of Long term debt in Total Capital structure(%)=$24,553,776/$98,553,776=24.91%

Weight of common equity in total Capital structure(%)=$64,000,000/$98,553,776=64.94%