In order to accurately assess the capital structure of a firm, it is necessary t

Question

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today, January 1, 2004, is as follows:

Long-term debt (bonds, at par) $10,000,000
Preferred stock 2,000,000
Common stock ($10 par) 10,000,000
Retained earnings 4,000,000
Total debt and equity $26,000,000

The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000. They mature on January 1, 2014. The yield to maturity is 12 percent, so the bonds now sell below par. What is the current market value of the firm's debt?

Explanation / Answer

The semi annual interest is $20, periods till maturity are 10x2=20, discounting rate is 12%/2=6% and the principal amount is $1,000. for current market value of debt, we need to find the market price of the bonds. The market value is Market Value = 20 X PVIFA (20,6%) + 1,000 X PVIF (20,6%) Market value = $541.20 Number of bonds =10,000,000/1,000 = 10,000 Current market value = 10,000X541.20 = $5,412,000

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