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Homework answers / question archive / To precisely evaluate the capital structure of a firm, it is necessary to transform its statement of financial position figures from their book values into their market values
To precisely evaluate the capital structure of a firm, it is necessary to transform its statement of financial position figures from their book values into their market values. "ABC Corporation's statement of financi position as of today is as follows: • Preferred stock (5100, 9%, Cumulative) $3,000,000 . Common stock ($10 par) 12,000,000 • Retained earnings 6,000,000 • Bonds Payable (at par) $10,000,000 The bonds have a par value of $1,000 and a stated rate of 4% that is payable every 6 months. They mature exactly 10 years from today. Based on the above-given information answer the following questions 1. What is the number of outstanding bonds? 12583333 x 2. if the market rate is 12%. What is the TOTAL current market value of the firm's bonds? x
The number of bonds outstanding is = Total par amount/Par value of one bond = $10,000,000/$1,000 = | 10000 | bonds | |
2] | The value of a bond is the sum of the following: | ||
1] The present value of the maturity value [which | |||
is usually the par value], and | |||
2] The present value of the coupons that are to be | |||
received periodically till the maturity of the bond. | |||
The coupons constitute an annuity. | |||
For discounting, the discount rate to be used is the | |||
market interest rate of 12%. | |||
The formula that can be used for the value of the bonds is: | |||
Value of the bonds = MV/(1+r)^n+C*((1+r)^n-1)/((r*(1+r)^n) | |||
where, | |||
MV = Maturity value | |||
r = market interest rate [ half-yearly] = 12%/2 = 6% | |||
n = number of half-years to maturity = 10*2 =20 | |||
C = Half-yearly coupons in dollars = $10,000,000*2% = $200,000 | |||
Hence, total current market value of the bonds = 10000000/1.06^20+200000*(1.06^20-1)/(0.06*1.06^20) = | $ 5,412,032 |