QUESTION9 3.3 points Save Anawer n order to acourately assess the capital struct
ID: 2792396 • Letter: Q
Question
QUESTION9 3.3 points Save Anawer n order to acourately assess the capital structure of a firm, it is necessary to convert its balance sheet figure from historical book values to market values. KJM Corporations balance sheet (book value) as of today is as fol ows: Long-term debt (bonds, at par $23,500,000 Preferred Stdak Common Stock ($10 pa) Retained Eamings Total Dabt and Equity 2,000,000 10,000,000 4,000,000 $39,500,000 bonds have a 70%cop n ate, payable serima yand a par vaue of S1,000. They mature exactly 10 years to below par. What is the current market value of the firm's debt? today. The y old to maturity is 10% so the bonds now sell Oa.$19,107,14 b.$17883,320 OG.$17,436.237 d. $7,898,650Explanation / Answer
NO. of bonds = Long term debt (bonds, at par)/Par value = 23,500,000/1,000 = 23,500
Value = Coupon * PVAF(10*2y,10%/2) + Redemtion Value * PVF(10y*2,10%/2)
Value = 35 * PVAF(20y,5%) + 1,000 * PVF(20y,5%)
Value = 35 * 12.462 + 1,000 * 0.377 = 813.17
Value of debt = No. of bonds * Current bond Market value
Value of Debt = 23,500 * 813.17 = 19,109,495
First option is the correect answer.