Suppose the School 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 10 percent, the same as the rate on new bank loans. The long-term debt consists of 30,000 bonds, each of which has a par vale of $1,000, carries an annual coupon interest rate of 6 percent, and matures in 20 years. The going rate of interest on new long-term debt, rd, is 10 percent, and this is the present yield to maturity on the bonds. The common stock sells at a price of $60 per share. Calculate the firm's market value capital structure.

Transcribed Image Text:

Current assets Fixed assets Total assets $30,000,000 50,000,000 $80,000,000 Current liabilities Long-term debt Common equity Common stock (1 million shares) Retained earnings Total claims $10,000,000 30,000,000 1,000,000 39,000,000 $80,000,000