Suppose the Schoof Company has this book value balance sheet: The notes payable

Question

Suppose the Schoof Company has this book value balance sheet:

The notes payable are to banks, and the interest rate on this debt is 10%, 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 50,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 6%, and a 20-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $75 per share. Calculate the weight of long term debt according to firm’s market value capital structure.

Include short-term debt when calculating individual weights, that is, calculate the weight of short-term debt (notes payable), the weight of long-term debt, and the weight of equity in order to get the answer for the weight of long-term debt.

Current assets $30,000,000 Current liabilities $20,000,000 Notes payable $10,000,000 Fixed assets 70,000,000 Long-term debt 30,000,000 Common stock (1 million shares) 1,000,000 Retained earnings 39,000,000 Total assets $100,000,000 Total liabilities and equity $100,000,000

Explanation / Answer

Solution.

Calculation of weight o long term Debt.

Particular's Amount Weight % Notes payable $10,000,000 5.74 Long-term debt $50,000,000 28.73 Common stock (1 million shares) $75,000,000 43.10 Retained earnings $39,000,000 22.41 Total $174,000,000 99.98

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