Market Value Capital Structure Suppose the Schoof Company has this book value ba
ID: 2616805 • Letter: M
Question
Market Value Capital Structure
Suppose the Schoof Company has this book value balance sheet:
The notes payable are 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 7%, and a 15-year maturity. The going rate of interest on new long-term debt, rd, is 11%, 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. Do not round intermediate calculations. Round your answers to two decimal places.
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 $100,000,000Explanation / Answer
Solution: The firm's market value capital structure The market value of ST debt $10,000,000.00 The market value of LT debt $21,370,956.52 The market capitalization of Equity $52,000,000.00 Total market value of capital structure $83,370,956.52 Working Notes: 1st The market value of ST debt = Notes Payable to bank = $10,000,000 2nd The market value of LT debt = No of bonds x Bond price (is bond market value) =30,000 x $712.3652173 =$21,370,956.519 =$21,370,956.52 Notes: Bond Price = Periodic Coupon Payments x Cumulative PVF @ periodic YTM (for t= to t=n) + PVF for t=n @ periodic YTM x Face value of Bond Coupon Rate = 7% Annual coupon = Face value of bond x Coupon Rate = 1,000 x 7% = $70 YTM= 11% p.a (annual) n= no.of coupon = No. Of years x no. Of coupon in a year = 15 x 1 = 15 Bond Price = Periodic Coupon Payments x Cumulative PVF @ periodic YTM (for t= to t=n) + PVF for t=n @ periodic YTM x Face value of Bond =$70 x Cumulative PVF @11% for 1 to 15th+ PVF @11% for 15th period x 1,000 =70 x 7.190869576 + 1000 x 0.209004347 =$712.3652173 Cumulative PVF @ 11 % for 1 to 15th is calculated = (1 - (1/(1 + 0.11)^15) ) /0.11 = 7.190869576 PVF @ 11% for 15th period is calculated by = 1/(1+i)^n = 1/(1.11)^15 =0.209004347 3rd The market capitalization of Equity = Current price of share x total no of shares outstanding =$52 x 1,000,000 =$52,000,000 Please feel free to ask if anything about above solution in comment section of the question.