In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet (book values)The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm's debt?

Question

Quizplus · Accepted Answer

To calculate the current market value of the firm's debt, we need to use the present value of the bond formula. Using a financial calculator or Excel, we can find that the current market value of the bond is $911.69. Then, we can simply multiply this by the number of bonds outstanding ($20 million/$1,000 = 20,000) to get the total market value of the debt: $911.69 * 20,000 = $18,233,800. However, since the bonds are currently selling below par, this market value needs to be adjusted downward by the bond discount: $18,233,800 - (($1,000 - $911.69) * 20,000) = $17,883,320. Therefore, the correct answer is B.

In Order to Accurately Assess the Capital Structure of a Firm