Question

a. $5,353,160

b. $5,352,399

c. $5,353,921

d. $5,354,682

e. $5,355,443

CMS Corporation's balance sheet as of today is as follows:

Long-term debt (bonds, at par)	$10,000,000
Preferred stock	2,000,000
Common stock ($10 par)	10,000,000
Retained earnings	4,000,000
Total debt and equity	$26,000,000

The bonds have an 3.9% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Select the correct answer.

Answer 1

Current market value of the firm's debt is = “ d. $5,354,682 “

Par Value             = $10,000,000

Interest Amount = $10,000,000 x 1.95% = $195,000

Yield to maturity = 6% [ 12% / 2 ]

Period = 10 Years x 2 = 20 Years

Market value of the Bond = Present Value of the Interest + Present Value of the Par Value

= $195,000 x (PVIF 6%,20 Years) + $1,00,00,000 x (PVF 6%, 20 Years)

= [ $195,000 x 11.46992 ] + [ $1,00,00,000 x 0.311805 ]

= $22,36,635 + $31,18,047

= $53,54,682

Hence, The answer is “ d. $5,354,682”