Market Value Capital Structure Suppose the Schoof Company has this book value ba
ID: 2781852 • Letter: M
Question
Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet:
$100,000,000
The notes payable are to banks, and the interest rate on this debt is 11%, 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 25-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 $68 per share.
Calculate the firm's market value capital structure. Do not round intermediate calculations. Round your answers to two decimal places.
Please fill in the blanks.
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 $100000 Total Liabilities & Equity$100,000,000
Explanation / Answer
Short term debt can be taken directly from the balance sheet current liabilities.
So Short term debt = Current liabilities = $20,000,000
Long term debt has to be based on the current market value of debt, for this we have to find out price on the bond in the market using the given information.
Coupon rate is 9%, so coupon on $1000 bond = 9% * 1000 = 90
Maturity is 25 years
YTM as in Yield to maturity is given as 11%
So price of the bond in the market can be calculated in excel as follows
Price =PV(11%,25,90,1000,0) = $831.57
Here 11% is the Yield, 25 is the years to maturity, 90 is the annual coupon, 1000 is the face value or redemption value and 0 is to say that payments are made at the end of the year
So Market value of long term debt = $831.57 * 30000 = $24,947,100
Market value of Equity = Share price in market * Number of shares outstanding = 68 * 1,000,000 = $68,000,000
Total Capital = $20,000,000 + $24,947,100 + $68,000,000 = $112,947,100
And value of proportion of short term debt, long term debt and equity are 17.71%, 22.09% and 60.21% respectively.
Summary-
Short-Term Debt $20,000,000 17.71% Long-Term Debt $ 24,947,100 22.09 % Common Equity $68,000,000 60.21 % Total Capital $ 112,947,100 100%