Question

The current stock price for a company is $33 per share, and there are 7 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%, 24 years to maturity, a face value of $1,000, and an annual yield to maturity of 6.8%, 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).

Answer 1

Coupon = (0.08 * 1000) / 2 = 40

Number of periods = 24 * 2 = 48

Rate = 6.8% / 2 = 3.4%

Current price = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Current price = 40 * [1 - 1 / (1 + 0.034)⁴⁸] / 0.034 + 1000 / (1 + 0.034)⁴⁸

Current price = 40 * 23.50248 + 200.91582

Current price = $1,141.015

Total market value of common stock = 7,000,000 * 33 = 231,000,000

Total market value of bond = 60,000 * 1,141.015 = 68,460,900

Total market value of capital structure = 231,000,000 + 68,460,900 = 299,460,900

Percent market value of debt = (68,460,900 / 299,460,900) * 100

Percent market value of debt = 22.86%