Question

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 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 20-year maturity. The going rate of interest on new long-term debt, r_d, is 11%, 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'smarket value capital structure. Do not round intermediate calculations. Round your answers to two decimal places.

Please show step by step process for the following answers needed:

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

Answer 1

1: Short term debt (Market value same as book value)

= Notes payable = 10,000,000

2: Bond price is computed as follows

Using financial calculator

Input:

FV = 1000; PMT =8%*1000 = 80; N = 20; I/Y = 11

Solve for PV as 761.10

Long term debt market value = Number of bonds * price

= 30000*761.10

= $22,833,004.69

3: Common equity market value = Common stock+ retained earnings

= 1000,000* 64 + 39000,000

=103,000,000

Total capital =

135833004.7

Short term debt % = 10000000/135833004.7 = 7.36%

Long term debt = 22833004.69/135833004.7 = 16.81%

Common equity = 103000000/135833004.7 = 75.83%