Question

Market Value Capital Structure Suppose the SchooL Company has this book value balance sheet: Current assets $30,000,000 Current liabilities $10,000,000 Notes payable 10,000,000 Fixed assets 50,000,000 Long-term debt 20,000,000 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 8%, 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 20-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 $52 per share. Calculate the firm's market value capital structure. Round your answers to two decimal places.

Answer 1

	Market Value	%
Market value of bank loan = Book value of the loan, as the interest rate on the notes payable is equal to the current market interest rates =	$       1,00,00,000	14.24%
MV of bonds = 20000000/1.1^20+20000000*8%*(1.1^20-1)/(0.1*1.1^30) =	$           82,24,628	11.71%
MV of common shares = 1000000*52 =	$       5,20,00,000	74.05%
Total market value	$       7,02,24,628	100.00%
The MV Capital structure is:
Debt 25.95%; Common Equity 74.05%
OR
Bank loan 14.24%, Bonds 11.71% and Common Equity 74.05%