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:
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
The bonds have a 7.4% 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?
The current price for the bonds is the present value of interest and principal discounted at the yield ...
The solution explains how to calculate the current market value of the firm's debt