Problem 11-16 Market Value Capital Structure Suppose the Schoof Company has this
ID: 2783583 • Letter: P
Question
Problem 11-16 Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: Current assets $10,000,000 10,000,000 20,000,000 $30,000,000 Current liabilities Notes payable Long-term debt Fixed assets 50,000,000 Common stock 1,000,000 39,000,000 $80,000,000 (1 million shares) Retained earnings Total assets $80,000,000 Total claims The current liabilities consist entirely of notes payable to banks, and the interest rate on this debt is 10%, 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 20-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 $60 per share. Calculate the firm's market value capital structure. Round your answers to two decimal places. Short-term debt Long-term debt Common equity Total capitalExplanation / Answer
Long term debt Total number of bonds 30000 Par value 1000 Annual coupon interest rate 0.07 time period 20 years Present Value = Future value/ ((1+r)^t) where r is 11% and t is the time period We can find the price of one bond and then multiply it by 30000 Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Future payment 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 70 1070 Present value 63.06 56.81 51.18 46.11 41.54 37.42 33.72 30.37 27.36 24.65 22.21 20.01 18.03 16.24 14.63 13.18 11.87 10.70 9.64 132.72 Price of bond/ sum of present values 681 Number of bonds 30000 Market value = 30000*681 Market value 20444006 Price of stock $60 Number of shares 1000000 Market value 60000000 Short term Debt 10000000 Long term Debt 20444006 Common equity 60000000 Total Capital 90444006