Reference no: EM132423092
Problem: Suppose the Schoof Company has this book value balance sheet:
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
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 short--term debt and the weight of long term debt according to firm's market value capital structure.
[Hint: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]