Debt Market Value
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In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM 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?
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Solution Summary
The solution computes current debt market value for KJM Corporation.
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Bond Price = Cashflow * { 1 - {1/(1+interest rate)^n}}/ interest rate + Maturity Value * 1/(1+interest ...
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