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PVS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) $10,000,000...

PVS 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 a 4.0% 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? Question 5 options:

a) $5,412,032

b) $5,547,332

c) $7,706,000

d) $7,898,650

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Answer #1

C = 0.04 * 1000 = 40 / 2 = 20 ( since it is a semi annual bond, we divide by 2)

Number of periods = 10 * 2 = 20 ( since it is a semi annual bond, we multiply by 2)

Rate = 0.12 / 2 = 0.06

Face value = 1000

Price of bond = 20 * [ 1 - [ 1 / (1 + 0.06)20]] / 0.06 + 1000 / ( 1 + 0.06)20

Price of bond = 20 * 11.469921 + 311.804727

Price of bond = $541.203147

Market value of bond = 541.2031 * 10,000 = $5,412,2032

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