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    Market Value of 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, 2004, 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, 2014. 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?

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    Solution Preview

    The current market value of the debt can be found out by finding the present market price of the bonds. The current price of athe bonds would be the sum of the rpesent values of the interest and and the principal payment. The interest amount on the bonds is $40 per year ...

    Solution Summary

    The solution explains how to calculate the market value of debt.