KJM Corporations balance sheet as of January 1, 2006 is as follows:Lon

QUESTION

KJM Corporations balance sheet as of January 1, 2006 is as follows:Long-term debt (bonds, at par) $10,000,000Preferred stock 2,000,000Common stock ($10 par) 10,000,000Retained earnings 4,000,000Total debt and equity $26,000,000The bonds have a 4% semiannual coupon rate and a par value of $1,000. Th
THE solution :Market value of the firms debt (bonds):Bonds are semiannual, so we need to make adjustments beforecalculating the PV per bond_M=10 years, N=20 period; Yield=12% period discount rate=12%/2=6%; per period coupon payment=$40/2 = $20 PV = 20 (1/0.06 1/0.06(1.06)^20) 1000/(1.06)^20 = 229.4

8 = $541.2 The book value of the bonds: $10,000,000, each bond has a par value of $1000. This means that 10,000,000 / 1000 = 10,000 bondsoutstanding.The market value of bonds = 10,000 * 541.2 = 5,412,000 $

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