Question

416. Capital Structure. Examine the following book- value balance sheet for University Products, Inc. What is the capital structure of the firm based on market values? The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are one million common shares out- standing. (LO2)

Answer 1

Assuming the balance sheet is in USD Mn.

Preferred stock book value = $2 Mn and Face value per share is $20. So number of shares = Book value / Face Value =$2Mn / 20 =  100,000.

Market value = price * number of shares = 15*100000=150000.

Market value of common shares = 20* 1000000=20000000

Market value of bonds can be calculated by excel using PV formula with below paramters :

Market value of $ 100 face value bond = PV(rate, NPER, PMT, FV) = - PV (9%,10,8,10) = $93.58. So, market value of $10 Mn bond is $9.358 Mn.

So total capital = market value of preferred + market value of bond + market value of common stock

Preferred stock	1500000	5%
Common stock	20000000	65%
Bond	9358000	30%
Total	30858000	100%