Question

Problem 9-16
Market Value Capital Structure

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
				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 9%, 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 9%, and a 20-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 $54 per share. Calculate the firm's market value capital structure. Do not round intermediate calculations. Round your answers to two decimal places.

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

Answer 1

Answer:

Short term debt:

Notes payable are to banks are used for company's permanent capital structure and hence are long term debts.

As such Short term debt = $0

Long Term debt:

Notes payable = $10,000,000

Bonds:

Annual coupon amount = 30000 * 1000 * 9% = $2,700,000

Face value = 1000 * 30000 = $30,000,000

Time to maturity = 20 years

Yield to maturity = 10%

To get current market value, we will use PV function of excel:

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

= PV (10%, 20, -2700000, -30000000, 0)

= $27,445,930.88

As such:

Market value of long term debt = 10000000 + 27445930.88 = $37,445,930.88

Common equity

Common equity market value = Number of outstanding shares * Current market price = 1000000 * $54 = $54,000,000