example of how to do it

Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: Current assets $30,000,000 70,000,000 Fixed assets Current liabilities Notes payable Long-term debt Common stock (1 million shares) Retained earnings $20,000,000 $10,000,000 30,000,000 1,000,000 39,000,000 Total assets $100,000,000 Total liabilities and equity $100,000,000 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 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 $64 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 Solution The total book and market value of the current liabilities and notes payable are both $30,000,000. The bonds have a value of V = $70(PVIFA 10%,25 ) + $1,000(PVIF 10%,25 ). = $70([1/0.10]-[1/(0.10*(1+0.10) 25 )]) + $1,000((1+0.10)-25). = $727.688799 Alternatively, using a financial calculator, input N = 25, I/YR = 10, PMT = -70, and FV = |-1,000 to arrive at a PV = $727.688799. The total market value of the long-term debt is 30,000($727.688799) = $21,830,663.98. There are 1 million shares of stock outstanding, and the stock sells for $66 per share. Therefore, the market value of the equity is $66,000,000. The market value capital structure is thus: Short-term debt 25.46% Long-term debt $30,000,000.00 21,830,663.98 66,000,000.00 18.53 56.01 Common equity Total capital $117,830,663.98 100.00%