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 is as follows: Long-term debt (bonds, at par)Preferred stock 2,000,000
Common stock ($10 par)Retained earnings 4,000,000
Total debt and equity $26,000,000
The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Question

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First, we need to calculate the current market value of the bonds. We know that the bond has a 4.0% annual coupon rate and pays semiannually, so the coupon payment is $20 ($1,000 * 0.04 * 0.5). We also know that the yield to maturity is 12%, which means the bond sells at a discount. We can use the bond pricing formula to find the current market price:

PV = (C / r) x (1 - 1 / (1 + r)^n) + F / (1 + r)^n
PV = (20 / 0.06) x (1 - 1 / 1.06^20) + 1,000 / 1.06^20
PV = $578.12 + $219.61
PV = $797.73

Therefore, the current market value of the bonds is $797.73 per bond.

To calculate the total market value of the debt, we need to multiply the current market value per bond by the number of bonds outstanding:

Total market value of debt = $797.73 x 2,000 = $1,595,460

Therefore, the current market value of the firm's debt is $1,595,460. However, this is just the market value of the bonds. We do not have enough information to calculate the market value of any other debt the firm may have.

In Order to Accurately Assess the Capital Structure of a Firm