In order to accurately assess the capital structure of a firm, it is necessary t

Question

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet (book values) as of today is as follows:

The bonds have a 8.3% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm's debt?

Long-term debt (bonds, at par) $23,500,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $39,500,000

Explanation / Answer

1 Face value (FV) $                               23,500,000 2 Coupon rate 8.30% 3 Number of compounding periods per year 2 4 = 1*2/3 Interest per period (PMT) $                                     975,250 5 Number of years to maturity 10 6 = 3*5 Number of compounding periods till maturity (NPER) 20 7 Market rate of return/Required rate of return 11.00% 8 = 7/3 Market rate of return/Required rate of return per period (RATE) 5.50% Market value of firm debt PV(RATE,NPER,PMT,FV)*-1 Market value of firm debt $                               19,708,741

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