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 9%, 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 12%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $54 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 equity 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

bond value = 90 * PVIFA(12%,25) + 1000 * PVIF(12%,25)

= 90 * 7.8431 + 1000 *0.0588

=764.679

short-term debt = 10,000,000 .................11.5%

long term debt = 30000 * 764.679 = 22,940,370 .....................26.39%

common equity = 1,000,000 * 54 = 54,000,000.....................62.11%

total capital = 86,940,370..............100%

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