CMS Corporation's balance sheet as of today is as follows: $\begin{array}{lr}
\text { Long-term debt (bonds, at par) } & \$ 10,000,000 \
\text { Preferred stock } & 2,000,000 \
\text { Common stock (\$10 par) } & 10,000,000 \
\text { Retained earnings } & 4.000,000\
\text { Total debt and equity }& \$ 26,000,000
\end{array}$
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?
A) $5,276,731
B) $5,412,032
C) $5,547,332
D) $7,706,000
E) $7,898,650

Question

Quizplus · Accepted Answer

Calculate the price of each bond:
 $$\begin{array} { l r } 
\text { Coupon rate } & 4.0 \% \
\text { Parvalue } & \$ 1,000 \
\text { Maturity (Yrs) } & 10 \
\text { Periods/Yr } & 2 \
\text { YTM } & 12.0 \% \
\text { N } & 20 \
\text { I/YR } & 6.0 \% \
\text { PMT } & \$ 20.00 \
\text { FV } & \$ 1,000 \
\text { PV } & \$ 541.20
\end{array}$$ 
Determine the number of bonds:
 $\begin{array} { l r } 
\text { Book value on balarice sheet } & \$ 10,000,000 \ 
\text { Par value } & \$ 1,000 \ 
\text { Nurber of bonds = Book value/Par value } & 10,000 \
\text {Calculate the market value of bonds:}\
\text {Mkt value = PV $\times$ Nuriber of bonds=}&\$55,412,032\
\end{array}$

CMS Corporation's Balance Sheet as of Today Is as Follows