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# Determining the Current Capital Structure of a firm

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Examine the following book-value balance sheet. What is the capital structure of the firm based on market value? Solve for Formulas below?

The preferred stock currently sells for \$15 per share and the common stock for \$20 per share. There are one million common share outstanding.

Assets
Cash and short-term securities \$1
Accounts receivable 3
Inventories 7
Plants and equipment 21
TOTAL ASSETS: \$32

Liabilities and Net Worth
Bonds, coupon = 8% paid annually
maturity = 10 years, yield to maturity = 9% \$10.0
Preferred stock (par value \$20 per share) 2.0
Common stock (par value \$.10) 0.1
Additional paid in stockholders 9.9
Retained earnings 10.0
TOTAL: \$32.0

Capital Structure
DOLLARS
Bonds FORMULA
Preferred Stock FORMULA
Common Stock FORMULA
Total \$0

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#### Solution Preview

Number of common stock outstanding = 0.1/\$0.10 = 1.0 Million
Market value of common stock = \$20 per share
Total market value of common stock = \$20*1=\$20 ...

#### Solution Summary

This post illustrates how to calculate the capitals structure for the firm from its balance sheet and given market price of its various liabilities and equities. Through this post, students will learn that there is a difference between the market value and historical value of the assets and liabilities and which value is appropriate for capital structure calculation for the firm.

\$2.49