Question

The current stock price for a company is $37 per share, and there are 2 million shares outstanding. This firm also has 280,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 7%, 24 years to maturity, a face value of $1,000, and an annual yield to maturity of 6.2%, what is the total market value of this firm? (Answer to the nearest dollar, but do not use a dollar sign).

Answer 1

Information provided:

Face value= future value= $1,000

Coupon rate= 7%/2= 3.5%

Coupon payment= 0.035*1,000= $35

Time= 24 years*2= 48 semi-annual periods

Yield to maturity= 6.2%/2= 3.10% per semi-annual period

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

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

FV= 1,000

PMT= 35

N= 48

I/Y= 3.10

Press the CPT key and PV to compute the present value.

The value obtained is 1,099.23.

Therefore, the current price of the bond is $1,099.23.

The market value of equity= $37*2,000,000

                                                           = $74,000,000.

The market value of debt= $1,099.23*280,0000

                                                = $307,784,400.

Market value of the firm= $74,000,000 + $307,784,400

                                               = $381,784,400.

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