Question
In order to accurately assess the capital structure of a firm, it is necessary to convert...
In order to accurately assess the capital structure of a firm,
it is necessary to convert its balance sheet figures from
historical book values to market values. KJM Corporation's balance
sheet (book values) as of today is as follows:
| Long-term debt (bonds, at par) | $23,500,000 |
| Preferred stock | 2,000,000 |
| Common stock ($10 par) | 10,000,000 |
| Retained earnings | 4,000,000 |
| Total debt and equity | $39,500,000 |
The bonds have a 8.3% coupon rate, payable semiannually, and a par
value of $1,000. They mature exactly 10 years from today. The yield
to maturity is 11%, so the bonds now sell below par. What is the
current market value of the firm's debt?
Homework Answers
Answer #1
Market value of bond is calculated in excel and screen shot provided below:
Market value of bond is $838.67.
Current market value of the firm's debt = ($23,500,000 / $1,000) × $838.67
= 23,500 × $838.67
= $19,708,741.16
Current market value of the firm's debt is $19,708,741.16.
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