Question

The current stock price for a company is $31 per share, and there are 6 million shares outstanding. This firm also has 60,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 8%, 10 years to maturity, a face value of $1,000, and an annual yield to maturity of 8%, what is the total market value of this firm? (Answer to the nearest dollar, but do not use a dollar sign).

Answer 1

Bonds:

Face Value = $1,000

Annual Coupon Rate = 8%
Semiannual Coupon Rate = 4%
Semiannual Coupon = 4% * $1,000
Semiannual Coupon = $40

Annual YTM = 8%
Semiannual YTM = 4%

Coupon Rate is equal to YTM. So, the current value of the bond is equal to the par value of the bond.

Current Price = $1,000
Number of bonds outstanding = 60,000

Value of Debt = Current Price * Number of bonds outstanding
Value of Debt = $1,000 * 60,000
Value of Debt = $60,000,000

Equity:

Number of shares outstanding = 6,000,000
Current price = $31

Value of Equity = Number of shares outstanding * Current price
Value of Equity = 6,000,000 * $31
Value of Equity = $186,000,000

Market Value of the Firm = Value of Debt + Value of Equity
Market Value of the Firm = $60,000,000 + $186,000,000
Market Value of the Firm = $246,000,000