Question

The current stock price for a company is $43 per share, and there are 3 million shares outstanding. This firm also has 80,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 6%, 10 years to maturity, a face value of $1,000, and an annual yield to maturity of 7.1%, what is the total market value of this firm? (Answer to the nearest dollar, but do not use a dollar sign).

Answer 1

Coupon payment = 0.06 * 1000 = 60 / 2 = 30

Rate = 0.071 / 2 = 0.0355 or 3.55%

Number of periods = 10 * 2 = 20

Bond price = Coupon payment * [ 1 - 1 / ( 1 + R)ⁿ] / R + FV / ( 1 + R)ⁿ

Bond price = 30 * [ 1 - 1 / ( 1 + 0.0355)²⁰] / 0.0355 + 1000 / ( 1 + 0.0355)²⁰

Bond price = 30 * 14.148318 + 497.7347

Bond price = $922.1842

Market value of bond = 80,000 * 922.1842 = $73,774,736

Market value of common stock = 3,000,000 * 43 = $129,000,000

Total market value = 73,774,736 + 129,000,000 = 202,774,736