Question

The current stock price for a company is $31 per share, and there are 2 million shares outstanding. This firm also has 200,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 6%, 29 years to maturity, a face value of $1,000, and an annual yield to maturity of 7.2%, what is the percent market value of debt for this firm? (Answer to the nearest hundredth of a percent, but do not use a percent sign).

Selected Answer: Incorrect 26.6

Correct Answer: Correct 73.39 ± 0.01<<<HOW WAS THIS ANSWER OBTAINED? PLEASE SHOW ALL STEPS AND IF USING EXCEL PLEASE EXPLAIN WHICH FUNCTIONS TO USE.

Answer 1

Market Price per Bond = Present Value of the Coupon Payments + Present Value of the Par Value

= $30 [PVIFA 3.60%, 58 Years] + $1,000[PVIF 3.60%, 58 Years]

= [$30 x 24.20643] + [$1,000 x 0.128568]

= $726.19 + 128.57

= $854.76

Market Value of the Debt = $17,09,52,000 [200,000 x $854.76]

Market Value of the Shares = $6,20,00,000 [20,00,000 Shares x $31]

Total market Value = $23,29,52,000 [$ 17,09,52,000 + $6,20,00,000]

Therefore, The percent market value of debt for this firm

= [Market Value of the Debt / Total Market Value] x 100

= [$17,09,52,000 / $23,29,52,000] x 100

= 73.39%

“Hence, The Answer is 73.39%”