To precisely evaluate the capital structure of a firm, it is necessary to transform its statement of financial position

Question

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

Help In Homework · Accepted Answer

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

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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

Expert Solution

Archived Solution

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)/(0.061.06^20) =	$ 5,412,032