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) as of today is as follows: Long-term debt (bonds, at par) $21,500,000 Preferred stock 1,000,000 Common stock ($10 par) 13,000,000 Retained earnings 5,000,000 Total debt and equity $40,500,000 The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 15 years from today. The yield to maturity is 10%, so the bonds now sell below par. What is the current market value of the firm's debt? Do not round your intermediate calculations.
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) as of today is as follows: Long-term debt (bonds, at par) $21,500,000 Preferred stock 1,000,000 Common stock ($10 par) 13,000,000 Retained earnings 5,000,000 Total debt and equity $40,500,000 The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 15 years from today. The yield to maturity is 10%, so the bonds now sell below par. What is the current market value of the firm's debt? Do not round your intermediate calculations.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:### Understanding Capital Structure: Converting Book Values to Market Values
To accurately assess a firm's capital structure, it is essential to convert balance sheet figures from historical book values to market values. Below is KJM Corporation's balance sheet (book values) as of today:
- **Long-term debt (bonds, at par):** $21,500,000
- **Preferred stock:** $1,000,000
- **Common stock ($10 par value):** $13,000,000
- **Retained earnings:** $5,000,000
**Total debt and equity:** $40,500,000
### Problem Statement
The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They will mature exactly 15 years from today. The yield to maturity is 10%, indicating the bonds are currently selling below par.
**Question:** What is the current market value of the firm's debt? Avoid rounding your intermediate calculations.
**Answer Options:**
- a. $17,738,794
- b. $17,120,773
- c. $16,594,079
- d. $16,453,708
- e. $16,542,385
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