Peoples Corporation\'s balance sheet as of today is as follows: Long- term debt

Question

Peoples Corporation's balance sheet as of today 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 an 7.4% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt? Please do not round intermediatly.

Explanation / Answer

Assumed redemption is at par i.e 1000

Discounting rate 6 Cash flow Dsic. Cash flow 1.00 0 0.00 1 0.94 37 34.91 2 0.89 37 32.93 3 0.84 37 31.07 4 0.79 37 29.31 5 0.75 37 27.65 6 0.70 37 26.08 7 0.67 37 24.61 8 0.63 37 23.21 9 0.59 37 21.90 10 0.56 37 20.66 11 0.53 37 19.49 12 0.50 37 18.39 13 0.47 37 17.35 14 0.44 37 16.37 15 0.42 37 15.44 16 0.39 37 14.56 17 0.37 37 13.74 18 0.35 37 12.96 19 0.33 37 12.23 20 0.31 1037 323.34 736.19

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