MINDTAP From Cengage Search this course Chapter 11 Homework eBook 23. O Market V

Question

MINDTAP From Cengage Search this course Chapter 11 Homework eBook 23. O Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: Current assets Fixed assets $30,000,000 Current liabilities Notes payable Long-term debt $20,000,000 $10,000,000 30,000,000 1,000,000 39,000,000 $100,000,000 70,000,000 Common stock (1 milion shares) Retained earnings Total liabilities and equity Total assets $100,000,000 The notes payable are 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 5easonal 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 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 $52 per share. Calculate the firm's market value capital structure. Do not round intermediate calculations. Round the monetary values to the nearest cent and percentage values to two decimal places. Short-term debt Long-term debt Common equity Total capital

Explanation / Answer

Computation of market value a) Notes payable market value = $       10,000,000 b) Bond Given that- Par value 1000 Coupon rate 9% Annual coupon 90 YTM = 10% Bond market price = PV of future cash flow = PV of coupon interest + PV of redemption value of bond at year 20th PVAF (10%,20) * 90 + PVIF(10%,20)*1000 =8.5135*90+0.1486*1000 914.82 # of bond 30000 Value of bond = 914.82*30000 $       27,444,450 c) # of equity             1,000,000 Market price per share $                  52.0 Market value of equity = 1million*52 $       52,000,000 Market value % Short term debt $ 10,000,000 11.2% Long-term bond $ 27,444,450 30.7% Common equity $ 52,000,000 58.1% Total Capital $ 89,444,450 100.0%

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