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    Market value of a firm's debt

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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, January 1, 2001, 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 percent coupon rate, payable semiannually, and a par value of $1,000. They mature on January 1, 2011. The yield to maturity is 12 percent, so the bonds now sell below par. What is the current market value of the firm's debt?

    a. $5,412,000
    b. $5,480,000
    c. $2,531,000
    d. $7,706,000
    e. $7,056,000

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    Solution Preview

    Answer: A

    Total number of bonds outstanding: $10,000,000/$1,000 = 10,000.

    Semiannual payment ...

    Solution Summary

    This solution evaluates the market value of a firm's debt in order to accurately assess the capital structure of a firm. The solution is obtained through step by step calculations.