What is the total market value of outstanding debt Use the following information

Question

What is the total market value of outstanding debt
Use the following information to answer the next six questions. Note, there are only two source of for the firm - debt and common stock. funds Debt: 10000 bonds outstanding, maturity in 7 years, periodic (six-month) yields 4%, annual coupon rate is 5% CS: One million shares outstanding, current market value is $20.00 per share, last annual dividend was $2.00 and the next dividend is expected to be $2.10 based upon the constant dividend growth model, the market risk premium is 7.0% and the risk-free rate is 3.5% 11What is the total market value of outstanding debt? 12What is the total market value of outstanding common stock?

Explanation / Answer

First to calculate market value of outstanding Debt

1. 10000 Bonds outstanding. Maturity in 7 years. Periodic six month yield is 4%. Annual coupon rate is 5%.

No of Years to Maturity N = 7 years

Six months Yield is 4%

Annual Yield = (1.04)*(1.04)-1=8.16%

Annual Coupon Rate is 5%

Assuming Face Value of Each Bond is $ 1000

Based on above we can calculate present market value of Bond with N=7, Coupon at 5% and annual Yield of 8.16%

Present Value of Bond = $ 836.3752

Total Market Value of Debt with 10000 oustanding Bonds = $836.3752*10000 = $8,363,751.546

2. One Million Shares outstanding with current market price of $20 per share

Total market value of Outstanding Common Stock = 1,000,000*20 = $20,000,000

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