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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.

a. $7,763,365
b. $7,762,246
c. $7,761,686
d. $7,761,126

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.

If you are having any doubts,plesae post a comment.

Thank You.Please rate it.

jeff jeffy answered 1 year ago
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