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: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? $\begin{array}{l}
\begin{array}{l}
\text { Long-term debt (bonds, at par) } \
\text { Preferred stock } \
\text { Common stock ( } \$ 10 \text { par) } \
\text { Retained eamings }\
\text { Total debt and equity }
\end{array}
\begin{array}{r}
\$ 10,000,000 \
2,000,000 \
10,000,000 \
\underline {4,000,000 }\
\$ 26,000,000
\end{array}
\end{array}$

Question

Quizplus · Accepted Answer

To calculate the current market value of the firm's debt, we need to use the bond pricing formula:

Market value of debt = C * [1 - (1 / (1 + r)^n)] / r + (F / (1 + r)^n)

Where:

C = coupon payment = 0.04 * 1000 / 2 = $20
r = yield to maturity = 12% / 2 = 6%
n = number of periods = 10 * 2 = 20
F = face value = $1000

So, the market value of debt is:

Market value of debt = 20 * [1 - (1 / (1 + 0.06)^20)] / 0.06 + (1000 / (1 + 0.06)^20) = $5,412,032

Therefore, the answer is B.

In Order to Accurately Assess the Capital Structure of a Firm,it