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    market value of the 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,
    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?

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    Solution Preview

    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 ...

    Solution Summary

    This job presents the market value of the debt.