Question

The current stock price for a company is $40 per share, and there are 3 million shares outstanding. This firm also has 230,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 7%, 18 years to maturity, a face value of $1,000, and an annual yield to maturity of 6.2%, what is the total market value of this firm? (Answer to the nearest dollar, but do not use a dollar sign).

Answer 1

Value of Equity = 3,000,000 shares * 40 = 120,000,000 .............. Equation - (1)

Value of Debt =

Bond value = Coupon * [ 1 - (1+r)^-n ] / r + Face value * ( 1+r)^-n

Coupon = 1000 * 7% = 70

r = Yield to maturity = 0.062

n = 18 years

= 70 * [ 1 - (1.062)^-18 ] / 0.062 + 1000 * (1.062)^-18

= 746.6788 + 338.65

= 1085.33

Market value of debt = 230 * 1085.33 = 249,626 .................Equation - (2)

Value of the firm = Equation - (1) + Equation - (2) = 120,000,000 + 249,626 = 120,249,626