Question

In: Finance

CMS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) $10,000,000...

CMS Corporation's balance sheet as of today is as follows:

Long-term debt (bonds, at par) $10,000,000

Preferred stock 2,000,000

Common stock ($10 par) 10,000,000

Retained earnings 4,000,000

Total debt and equity $26,000,000

The bonds have an 4.6% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par.

What is the current market value of the firm's debt?

Select the correct answer. a. $5,756,129

b. $5,756,973

c. $5,755,285

d. $5,754,441

e. $5,753,597

Solutions

Expert Solution

Answer is a. $5,756129

This question requires us to calculate the current value of bond. Current value or market price of bond is basically the present value of all cashflows associated with the bond – namely coupon and maturity value, discounted at market interest rate (or YTM).

In this question, we need to calculate the price of bond, with given characteristics.

The balance sheet has $10,000,000 recorded as long term debt and each bond has a face value of $1,000. So, number of bonds outstanding = 10,000,000/1,000 = 10,000

Let us calculate the price of a single bond first, and then we can calculate the price of total bonds outstanding. Mathematical relation for finding price of a bond is as given below:

Where M is the maturity value ($1000 in our case)

i is the YTM (12% annually -- > 6% semi-annually)

C is the coupon paid (4.6% annually -- > 2.3% semi-annually. Hence $1000 * 2.3% = $23 per semi-annual period)

N is the number of periods to maturity (10 years -- > 20 semi-annual periods)

Substituting these values in mathematical relation above, we get:

P = 23 * 11.46992 + 311.804727

P = 263.808188 + 311.804727

Hence, price of 1 bond = $575.612915

Price of 10,000 bonds = $5,756,129.15 (Market value of debt)

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

CMS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) $10,000,000...
CMS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) $10,000,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $26,000,000 The bonds have a 8.1% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt? Select the correct...
CMS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) $10,000,000...
CMS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) $10,000,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $26,000,000 The bonds have an 4.3% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt? Select the correct...
MS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) $10,000,000...
MS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) $10,000,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $26,000,000 The bonds have an 6.4% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?
Balance Sheet Data                Long-Term Debt               80,000,000       &nb
Balance Sheet Data                Long-Term Debt               80,000,000                Preferred Stock                20,000,000                Common Equity                20,000,000 Number of shares of Common                 1,500,000                         Price per share Common             $42 Number of shares of Preferred                     150,000                               Price per share Preferred            $108 Number of 8% Coupon 25-year Bonds          40,000               Price of 8% 25-year Bonds   $1075 Number of 6% Coupon 15-year Bonds          40,200                           Price of 6% 15-year Bonds   $920 Forecasted Dividend on Common (D1)             $3.30                           Dividend Rate on Preferred           ...
Balance Sheet Data                Long-Term Debt               80,000,000       &nb
Balance Sheet Data                Long-Term Debt               80,000,000                Preferred Stock                20,000,000                Common Equity                20,000,000 Number of shares of Common                 1,500,000                         Price per share Common             $42 Number of shares of Preferred                     150,000                               Price per share Preferred            $108 Number of 8% Coupon 25-year Bonds          40,000               Price of 8% 25-year Bonds   $1075 Number of 6% Coupon 15-year Bonds          40,200                           Price of 6% 15-year Bonds   $920 Forecasted Dividend on Common (D1)             $3.30                           Dividend Rate on Preferred           ...
Balance Sheet Data                 Long-Term Debt               80,000,000      &nb
Balance Sheet Data                 Long-Term Debt               80,000,000                 Preferred Stock                20,000,000                 Common Equity                20,000,000 Number of shares of Common                 1,500,000                             Price per share Common              $42 Number of shares of Preferred                     150,000                             Price per share Preferred             $108 Number of 8% Coupon 25-year Bonds          40,000                            Price of 8% 25-year Bonds            $1075 Number of 6% Coupon 15-year Bonds          40,200                            Price of 6% 15-year Bonds            $920 Forecasted Dividend on Common (D1)             $3.25                            Dividend Rate on Preferred         9.5% Par...
Balance Sheet Data                Long-Term Debt               80,000,000       &nb
Balance Sheet Data                Long-Term Debt               80,000,000                Preferred Stock                20,000,000                Common Equity                20,000,000 Number of shares of Common                 1,500,000                         Price per share Common             $42 Number of shares of Preferred                     150,000                               Price per share Preferred            $108 Number of 8% Coupon 25-year Bonds          40,000               Price of 8% 25-year Bonds   $1075 Number of 6% Coupon 15-year Bonds          40,200                           Price of 6% 15-year Bonds   $920 Forecasted Dividend on Common (D1)             $3.30                           Dividend Rate on Preferred           ...
Long-term liabilities Long-term debt violation at the balance sheet date Note: In the following exercise, you...
Long-term liabilities Long-term debt violation at the balance sheet date Note: In the following exercise, you are required to review the Basis for Conclusions (BCs) for the standard(s) that provide the accounting guidance for this topic. As the BCs are generally not included in the codification and thus are not authoritative, it will most likely be necessary for you to research them through review of the pre-codified standards. Appropriate references have been provided to allow you to do so. Pre-codified...
Typical balance sheet classifications are as follows. a. Current Assets       b. Long-term Investments    ...
Typical balance sheet classifications are as follows. a. Current Assets       b. Long-term Investments     c. Property Plant & Equipment       d. Intangible Assets    e. Other Assets                   f. Current Liabilities            g. Long-Term Liabilities          h. Capital Stock            i. Additional Paid-In Capital        j. Retained Earnings                       k. Notes to Financial Statements Indicate by use of the above letters how each of the following items would be classified on a balance sheet prepared at December 31,...
Kidder corporations balance sheet shoes an historic book value for long term debt of 23,500,000. The...
Kidder corporations balance sheet shoes an historic book value for long term debt of 23,500,000. The bonds have a 6.4% coupon rate, payable semiannually, and a par value of $1000. They mature exactly 10 years from today. The yield to maturity is 9.70% so the bond now sell below par, what is the current market value of the firms debt?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT