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Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: Current assets $30,000,000 $20,000,000 10,000,000 30,000,000 1,000,000 Fixed assets Current liabilities Notes payable Long-term debt Common stock (1 million shares) Retained earnings Total liabilities and equity 70,000,000 39,000,000 Total assets $100,000,000 $100,000,000 The notes payable are to banks, and the interest rate on this debt is 8%, the same as the rate on new bank loans
Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: Current assets $30,000,000 $20,000,000 10,000,000 30,000,000 1,000,000 Fixed assets Current liabilities Notes payable Long-term debt Common stock (1 million shares) Retained earnings Total liabilities and equity 70,000,000 39,000,000 Total assets $100,000,000 $100,000,000 The notes payable are to banks, and the interest rate on this debt is 8%, 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 6%, and a 25-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 $52 per share. Calculate the firm's market value capital structure. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places. % Short-term debt Long-term debt Common equity Total capital %
Expert Solution
|
Capital Components |
Market Value |
Weight of Capital Structure |
|
|
|
|
|
Short-term debt |
$10,000,000 |
12.84% |
|
Long-term debt |
$15,882,300 |
20.39% |
|
Common equity |
$52,000,000 |
66.77% |
|
|
|
|
|
Total capital |
$77,882,300 |
100.00% |
Market Value of each capital components
Market Value of Short-term debt
Market Value of Short-term debt = $10,000,000 (Value of Note Payables)
Market Value of Long-term debt
The Market Value of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value
The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value. The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
Here, the calculation of the Bond Price using financial calculator is as follows
|
|
|
|
|
Variables |
Financial Calculator Keys |
Figures |
|
|
|
|
|
Face Value [-$1,000] |
FV |
-1,000 |
|
Coupon Amount [$1,000 x 6%] |
PMT |
60 |
|
Market Interest Rate or Required Rate of Return [12%] |
1/Y |
12 |
|
Time to Maturity [25 Years] |
N |
25 |
|
Bond Price |
PV |
? |
|
|
|
|
Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $529.41.
Market Value of Long-term debt = Number of long-term Bonds x Market Price per bond
= 30,000 Bonds x $529.41 per bond
= $15,882,300
Market Value of Common equity
Market Value of Common equity = Number of common shares outstanding x Market price per share
= 10,00,000 Common shares x $52 per share
= $52,000,000
Total Market Value = $77,882,300
Weight of Capital Structure
Weight of Short-term debt = 12.84% [($10,000,000 / $77,882,300) x 100]
Long-term debt = 20.39% [($15,882,300 / $77,882,300) x 100]
Common equity = 66.77% [($52,000,000 / $77,882,300) x 100]
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