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) Preferred stock Common stock ($10 par) Retained earnings Total debt and equity $21,500,000 3,000,000 9,000,000 5,000,000 $38,500,000 The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 20 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. O a. $16,008,751 O b. $17,290,043 O c. $15,966,195 O d. $15,921,592 O e. $16,611,805

Essentials Of Investments
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Chapter1: Investments: Background And Issues
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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)
Preferred stock
Common stock ($10 par)
Retained earnings
Total debt and equity
$21,500,000
3,000,000
9,000,000
5,000,000
$38,500,000
The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 20 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.
O a. $16,008,751
O b. $17,290,043
c. $15,966,195
O d. $15,921,592
O e. $16,611,805
Transcribed Image Text: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) Preferred stock Common stock ($10 par) Retained earnings Total debt and equity $21,500,000 3,000,000 9,000,000 5,000,000 $38,500,000 The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 20 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. O a. $16,008,751 O b. $17,290,043 c. $15,966,195 O d. $15,921,592 O e. $16,611,805
Francis Inc.'s stock has a required rate of return of 12.45%, and it sells for $72.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D₁?
a. $4.96
O b. $4.68
c. $9.03
O d. $4.41
O e. $4.35
Transcribed Image Text:Francis Inc.'s stock has a required rate of return of 12.45%, and it sells for $72.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D₁? a. $4.96 O b. $4.68 c. $9.03 O d. $4.41 O e. $4.35
Expert Solution
Step 1: Explain the Bond Present value and Dividend at the year end

Bond's present value can be determined by discounting all future cash flows of coupon amount adding to the present value of the maturity amount.

dividend at the year end can be determined by using the formula of dividend discounting model

straight P 0 equals fraction numerator Dividend subscript 0 space cross times left parenthesis 1 plus Growth space rate right parenthesis subscript blank over denominator left parenthesis Required space rate space of space return space minus space Growth space rate right parenthesis end fraction
or
straight D 1 equals straight P 0 asterisk times left parenthesis Required space rate space of space return minus space Growth space rate right parenthesis


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