Question
In: Finance
Suppose a firm has $7,069,714 in 18 year capital debt on its balance sheet at a...
Suppose a firm has $7,069,714 in 18 year capital debt on its balance sheet at a coupon rate of 6.53%. The debt was issued 9 years ago and pays interest semi-annually in a market in which similar debt is yielding 9.79%. What is the market value of the firm's capital debt? You can assume the debt is in the form of bonds, each having a face value of $1,000.
Solutions
Expert Solution
Remaining term is 9 years that is 18 interest periods.
| Particulars | Cash flow | Discount factor | Discounted cash flow |
| present value Interest payments-Annuity (4.895%,18 periods) | $ 230,826.16 | 11.78608 | $ 2,720,534.80 |
| Present value of bond face amount -Present value (4.895%,18 periods) | $ 7,069,714.00 | 0.42307 | $ 2,990,994.91 |
| Bond price | $ 5,711,529.71 | ||
| Face value | $ 7,069,714.00 | ||
| Premium/(Discount) | $ (1,358,184.29) | ||
| Interest amount: | |||
| Face value | 7,069,714 | ||
| Coupon/stated Rate of interest | 6.530% | ||
| Frequency of payment(once in) | 6 months | ||
| Interest amount | 7069714*0.0653*6/12= | $ 230,826.16 | |
| Present value calculation: | |||
| yield to maturity/Effective rate | 9.79% | ||
| Effective interest per period(i) | 0.0979*6/12= | 4.895% |
Market value of debt is 5,711,529.71
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