Problem 9-16 Market Value Capital Structure Suppose the Schoof Company has this
ID: 2730333 • Letter: P
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
Short term debt:
Notes Payable = $10000000
Long Term Debt:
Par Value = $30000000
Interest = $30000000 * 8% = $2400000
Yield to Maturity = 11%
Years to Maturity = 20
Value of long term debt
= (Interest * PVAF (11%, 20)) + (Maturity Value * PVF (11%, 20))
= (2400000 * 7.963) + (30000000 * 0.124)
= 19111200 + 3720000
= $22831200
Common Equity:
Value of Equity = 1million shares * 62
= $62000000
Firm’s market value capital structure:
Type of capital
Market Value
Percentage
Short term debt
$10000000
10.54%
Long term debt
$22831200
24.08%
Common stock
$62000000
65.38%
$94831200
100%
Type of capital
Market Value
Percentage
Short term debt
$10000000
10.54%
Long term debt
$22831200
24.08%
Common stock
$62000000
65.38%
$94831200
100%
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