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

Question

In order to accurately assess the captial structure of a firm,it is necessary to convert its balance sheet figures fromhistorical book value to marekt value. KJM Coporation balance sheet(book value) as of today is as follows: Long-term debt (bonds, atpar)            $23,500,000 PreferredStock                                     2,000,000 Common Sock ($10par)                      10,000,000 RetainedEarnings                                 4,000,000 Total debt andequity                           $39,500,000 The bonds have a 7 % coupon rate, payable seminanually, and apar vaule of $1,000. They mature exactly 10 years from today. Theyeild to maturity is 11%, so the bonds now sell belwo par. What isthe current market value of the firm's debt? In order to accurately assess the captial structure of a firm,it is necessary to convert its balance sheet figures fromhistorical book value to marekt value. KJM Coporation balance sheet(book value) as of today is as follows: Long-term debt (bonds, atpar)            $23,500,000 PreferredStock                                     2,000,000 Common Sock ($10par)                      10,000,000 RetainedEarnings                                 4,000,000 Total debt andequity                           $39,500,000 The bonds have a 7 % coupon rate, payable seminanually, and apar vaule of $1,000. They mature exactly 10 years from today. Theyeild to maturity is 11%, so the bonds now sell belwo par. What isthe current market value of the firm's debt? The bonds have a 7 % coupon rate, payable seminanually, and apar vaule of $1,000. They mature exactly 10 years from today. Theyeild to maturity is 11%, so the bonds now sell belwo par. What isthe current market value of the firm's debt?

Explanation / Answer

23,500 bonds

7% (Semiannual)

10 years

Long-term debt (bonds, at par) $23,500,000.00 Preferred Stock $2,000,000.00 Common Stock ($10 par) $10,000,000.00 Retained Earnings $4,000,000.00 Total Debt and Equity $39,500,000.00 Par Value of the Bond $1,000 Number of Bonds ($23,500,000 / $1,000)

23,500 bonds

(23,500 * $1,000) Coupon Rate

7% (Semiannual)

Number of Years to Maturity

10 years

Yield to Maturity (YTM) 11% Calculating Bond Value: Bond Value   = [$1,000 *7% / 2] (PVIFA 5.5%,20) + $1,000 (PVIF5.5%, 20) Bond Value   = $35 *11.950 + $1,000 * 0.34273 Bond Value   = $418.25 +$342.73 Bond Value = $760.98 Current Market Value of the Firm's Debt= Number of Bonds * Current Price per Bond Current Market Value of the Firm's Debt= 23,500 * $760.98 Current Market Value of theFirm's Debt = $17,883,030

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.