Suppose the Schoof Company has this book value balance sheet: The current liabil

Question

Suppose the Schoof Company has this book value balance sheet:

The current liabilities consist entirely of notes payable 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 7%, and a 15-year maturity. The going rate of interest on new long-term debt, rd, is 12%, 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. Round your answers to two decimal places.

Current assets $30,000,000 Current liabilities $10,000,000 Fixed assets 50,000,000 Long-term debt 30,000,000   Common stock   (1 million shares) 1,000,000 Retained earnings 39,000,000 Total assets $80,000,000 Total claims $80,000,000

Explanation / Answer

Price of Bond = 70*PVIFA(12%,15) + 1000*PVIF(12%,15)
= $659.46

Market Value of Bonds = 659.46*30,000 = $19,783,800

Market Value of Shares = 52*1,000,000 = $52,000,000

Short-term debt $       10,000,000 12.23% Long-term debt $       19,783,800 24.19% Common equity $       52,000,000 63.58% Total capital $       81,783,800 100.00%

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