U am attempting to learn finance by myself and have no access to
anyone else who can help me understand this, so thanks for bearing
with me.

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

ASSETS			               LIAB. & NET WORTH			
Cash & short-term securities  $1       Bonds, coupon=8% paid annually/		
                     		       maturity=10 yrs./yield to matur.=9% $10 
Accounts receivable	       3       Preferred stock (par value $20)       2 
			               Common stock (par value $.10)        0.1
Inventories		       7       Additional paid in stockholders      9.9
Plant & equipment	      21       Retained earnings	  	    10 
Total		             $32 				           $32 

I need to figure outthe capital structure in dollars:

Bonds
Preferred Stock
Common Stock
     TOTAL

Hi wombat319!!


I will assume that all values in the table are in millions.


-First find debt's market value:

Market value of debt = PV of future payments (coupons and principal)
discounted at cost of debt (the yield to maturity)

Coupon payments = 0.08 * $10 million = $0.8 million

For references on the PV formula see:
http://www.netmba.com/finance/time-value/annuity/

PV of Coupons:
         C             C                       C  
PV = ---------  +  ----------  +  ....  +  ---------- =
      (1 + R)      (1 + R)^2               (1 + R)^10  

   = (C/R) * [(1 - (1 / (1 + R)^10))] =
   = (0.8 / 0.09) * [(1 - (1 / (1.09)^10))] =
   =  8.888 * 0.5776 =
   = $5.134 million


PV of principal:

PV = P / (1 + R)^10 =
   = $10 million / (1.09)^10 =
   = $4.224 million

Market value of debt = PV of Coupons + PV of principal =
                     = $5.134 million + $4.224 million =
                     = $9.36 million


-Market value of preferred stock:

We have $2.0 million in preferred stocks at a par value of $20, this
means that we have (2.0 million / 20 =) 100,000 shares of preferred
stock.
If the current market value of each share of prefered stock is $15 we have that:

Market value of preferred stock = 100,000 shares * $15 =
                                = $1.5 million



-Market value of common stock:

There are one million common shares outstanding. If the current market
value of each share of common stock is $20 we have that:

Market value of common stock = 1,000,000 shares * $20 =
                                = $20 million

 
The Capital Structure for University Products, Inc. based on market value is:

Market value of debt ________________ $9.36 million -----> 30.33%
Market value of preferred stock _____ $1.5 million  ----->  4.86%
Market value of common stock ________ $20.0 million -----> 64.81% 
                                  ---------------------
Total market value of firm___________ $30.86 million


I hope that this helps you. Feel free to request for a clarification
if you need it.

Regards.
livioflores-ga

THANKS AGAIN!