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,
June 4, 2006, 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 June 4, 2016. The yield to maturity is 12 percent, so the bonds now sell below par.
What is the total current market value of the firm's debt?
The market value of debt can be calculated using this formula:
Value of Debt = C*(1 - (1/(1+r)^n))/r + F/(1+r)^n
C is the coupon payment per period
n is the number of periods until maturity
r is the interest rate per period
F is the par value of the debt
In your case, we have that F = 10,000,000. The coupon payment per period is ...
This job presents the market value of the debt.