Question

The current stock price for a company is $37 per share, and there are 4 million shares outstanding. This firm also has 280,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 8%, 30 years to maturity, a face value of $1,000, and an annual yield to maturity of 8.4%, what is the percent market value of debt for this firm? (Answer to the nearest hundredth of a percent, but do not use a percent sign).

Answer 1

Information provided:

Current stock price= $37

Number of shares outstanding= 4,000,000

Number of bonds outstanding= 280,000

Face value= future value= $1,000

Coupon rate= 8%/2= 4%

Coupon payment= 0.040*1,000= $40

Time= 30 years*2= 360 semi-annual periods

Yield to maturity= 8.4%/2= 4.2% per semi-annual period

The question is solved by first computing the current price of the bond.

The price of the bond is calculated by the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 40

I/Y= 4.2

N= 360

The value obtained is 952.38.

Therefore, the current price of the bond is $952.38.

Market value of equity= $37*4,000,000= $148,000,000.

Market value of debt= $952.38*280,000= $266,666,400.

Therefore, the market value of the firm is:

= $148,000,000+ $266,666,400

= $414,666,400.

Percent of market value of debt= $266,666,400/ $414,666,400

                                                  = 0.6431*100

                                                   = 64.31%.

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