Market Value Capital Structure Suppose the Schoof Company has this book value ba

Question

Market Value Capital Structure

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 8%, 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 $62 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

short term debt = 10,000,000

percentage = 10.66%

price of bond

= 80 * [1 - (1+ 12%)^-15]/12% + 1000/(1+12%)^15

= 727.57

long term debt = 30000 * 727.57

= 21,827,100

percentage = 23.26%

common equity = 1000000 * 62 = 62,000000

percentage = 66.08%

total capital = 93,827,100

percentage = 100%

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