CMS Corporation\'s balance sheet as of today is as follows Long-term debt (bonds
ID: 2825895 • Letter: C
Question
CMS Corporation's balance sheet as of today is as follows Long-term debt (bonds, at par) Preferred stock Common stock ($10 par) Retained earnings Total debt and equity $10,000,000 2,000,000 10,000,000 4,000,000 $26,000,000 The bonds have an 5.3% 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? Select the correct answer a. $6,158,223 b. $6,158,870 c. $6,159,517 d. $6,157,576 e. $6,156,930Explanation / Answer
Facts Given:
Option D is correct : Current Market Value of Firm Debt= $ 6,157, 576Facts Given:
Annual Coupon Rate (I): 5.30% Semiannually Coupon Rate (I/2): 2.65% Par Value of Bonds $1,000 Period of Maturity(Yrs) 10 Years Semiannually (Yrs*2) 20 Yield to Maturity (YTM) 12% Discount Rate (YTM/2) 6% Calculate the price of each bond: Interest on bond 2.65%*1000= $26.50 Face Value of Bond $1,000 Market Value of each bond= 26.50/ 1.06 till 20 period + 1000/ (1.06) of 20th period Market Value of each Bond = Cumulative PV of Interest + PV of Face/ Maturity Value OR Market Value of each bond= Interest/ (1+ Yield) till 20 period + Face Value / (1+ Yield) of 20th period Market Value of each bond= 26.50/ 1.06 till 20 period + 1000/ (1.06) of 20th period Market Value of each bond= 303.9529+311.8047 Market Value of each bond= 615.7576 No. of Bonds = Book Value of Bonds/ Par Value of each bond No. of Bonds = 10,000,0000/ 1000 No. of Bonds = 10000 Current Maket Value of the Firm Debt(Bonds)= No. of Bonds * Market Value of each bond Current Market Value of the Firm Debt (Bonds)= 10000*615.7576 Current Market Value of the Firm Debt (Bonds)= $6,157,576