Problem 9-16 Market Value Capital Structure Suppose the Schoof Company has this

Question

Problem 9-16 Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: 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 The current liabilities consist entirely of notes payable 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 8%, 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 $62 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 capital $ %

Explanation / Answer

Schoof Company Details Amt $/No No of outstanding common stocks          1,000,000 Market Price per share                          62 Total Market Value of common equity =        62,000,000 Bond Valuation   No of Bonds Outstanding                  30,000 Par value of bond                  1,000 Annual interest @8%                        80 YTM = 11% Years to maturity                          20 Bond Market price calculation Year Cash flow from interest +Maturity PV factor @11% PV of Cash flows Year 1                        80                0.901                72.07 Year 2                        80                0.812                64.93 Year 3                        80                0.731                58.50 Year 4                        80                0.659                52.70 Year 5                        80                0.593                47.48 Year 6                        80                0.535                42.77 Year 7                        80                0.482                38.53 Year 8                        80                0.434                34.71 Year 9                        80                0.391                31.27 Year 10                        80                0.352                28.17 Year 11                        80                0.317                25.38 Year 12                        80                0.286                22.87 Year 13                        80                0.258                20.60 Year 14                        80                0.232                18.56 Year 15                        80                0.209                16.72 Year 16                        80                0.188                15.06 Year 17                        80                0.170                13.57 Year 18                        80                0.153                12.23 Year 19                        80                0.138                11.01 Year 20                  1,080                0.124             133.96 Total             761.10 So current Bond price = $            761.10 Total Market value of 30,000 bonds= $   22,833,005 Market Value Capital Structure Amt $ Equity        62,000,000 Bond          22,833,005 Bank Loan        10,000,000 Total Market Value of Capital        94,833,005

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