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Market Value of debt

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?

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.

$2.19