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 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 answer.
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Solutions
Expert Solution
We know that at YRM , Present value of the future cash inflows is the market price of the bond
Coupon Amount = $ 1000*8.1% /2 = $ 40.5( Sincew the Coupons are paid semi annually)
YTM = 12% ( OR ) 6% for 6 Months
No.of Coupon payments remaining = 10*2 = 20
No.of Bonds that the Company have = $ 100,00000/$ 1000
= 10000 bonds.
Calculation of Current price of a bond
| S.No | Cash flow | Disc @ 6% | Discounted cash flows |
| 1 | $40.50 | 0.9434 | $38.2075 |
| 2 | $40.50 | 0.8900 | $36.0449 |
| 3 | $40.50 | 0.8396 | $34.0046 |
| 4 | $40.50 | 0.7921 | $32.0798 |
| 5 | $40.50 | 0.7473 | $30.2640 |
| 6 | $40.50 | 0.7050 | $28.5509 |
| 7 | $40.50 | 0.6651 | $26.9348 |
| 8 | $40.50 | 0.6274 | $25.4102 |
| 9 | $40.50 | 0.5919 | $23.9719 |
| 10 | $40.50 | 0.5584 | $22.6150 |
| 11 | $40.50 | 0.5268 | $21.3349 |
| 12 | $40.50 | 0.4970 | $20.1273 |
| 13 | $40.50 | 0.4688 | $18.9880 |
| 14 | $40.50 | 0.4423 | $17.9132 |
| 15 | $40.50 | 0.4173 | $16.8992 |
| 16 | $40.50 | 0.3936 | $15.9427 |
| 17 | $40.50 | 0.3714 | $15.0403 |
| 18 | $40.50 | 0.3503 | $14.1889 |
| 19 | $40.50 | 0.3305 | $13.3858 |
| 20 | $1,040.50 | 0.3118 | $324.4328 |
| Total | $776.3365 |
So the Market price of 10000 bonds is $ 776.3365*10000= $ 77,63365.
So the Market value of the debt is $7763365.So option a)$ 7763365 is the correct answer.
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jeff jeffy answered 1 year agoRelated 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 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
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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
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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%
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