SUM Company\'s balance sheet as of today is as follows: Long-term debt (bonds, a
ID: 2655181 • Letter: S
Question
SUM Company'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 9.3% 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 company's debt?
Select the correct answer and explain answer:
A) $8,451,561
B)
$8,452,911
C) $8,450,886
D)
$8,452,236
E) $8,450,211
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
Explanation / Answer
A) $8,451,561 Par Value of Debt 10,000,000.000 Par Value of 1bond 1,000.000 No of Bonds 10,000.000 Coupon Payment = 10,000,000*9.3%/2 465,000.000 Statement showing calculation of present Value of Debt Particulars Time PVF@6% Amount PV(Amount *PVF) Cash Inflows(Coupon Payment) 0.500 0.943 465,000.000 438,679.25 Cash Inflows(Coupon Payment) 1.000 0.890 465,000.000 413,848.34 Cash Inflows(Coupon Payment) 1.500 0.840 465,000.000 390,422.97 Cash Inflows(Coupon Payment) 2.000 0.792 465,000.000 368,323.55 Cash Inflows(Coupon Payment) 2.500 0.747 465,000.000 347,475.05 Cash Inflows(Coupon Payment) 3.000 0.705 465,000.000 327,806.65 Cash Inflows(Coupon Payment) 3.500 0.665 465,000.000 309,251.56 Cash Inflows(Coupon Payment) 4.000 0.627 465,000.000 291,746.75 Cash Inflows(Coupon Payment) 4.500 0.592 465,000.000 275,232.79 Cash Inflows(Coupon Payment) 5.000 0.558 465,000.000 259,653.57 Cash Inflows(Coupon Payment) 5.500 0.527 465,000.000 244,956.20 Cash Inflows(Coupon Payment) 6.000 0.497 465,000.000 231,090.75 Cash Inflows(Coupon Payment) 6.500 0.469 465,000.000 218,010.15 Cash Inflows(Coupon Payment) 7.000 0.442 465,000.000 205,669.95 Cash Inflows(Coupon Payment) 7.500 0.417 465,000.000 194,028.25 Cash Inflows(Coupon Payment) 8.000 0.394 465,000.000 183,045.52 Cash Inflows(Coupon Payment) 8.500 0.371 465,000.000 172,684.45 Cash Inflows(Coupon Payment) 9.000 0.350 465,000.000 162,909.86 Cash Inflows(Coupon Payment) 9.500 0.331 465,000.000 153,688.55 Cash Inflows(Coupon Payment) 10.000 0.312 465,000.000 144,989.20 Cash Inflows(Maturity Amount) 10.000 0.312 10,000,000.000 3,118,047.27 PV of Debt 8,451,560.64
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