Question

The current stock price for a company is $37 per share, and there are 3 million shares outstanding. This firm also has 110,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 7%, 30 years to maturity, a face value of $1,000, and an annual yield to maturity of 8.3%, 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:

Face value= $1,000

Coupon rate= 7%/2= 3.5%

Coupon payment= 0.035*1,000= $35

Time= 30 years*2= 60 semi-annual periods

Yield to maturity= 8.3%/2= 4.15%

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

FV= 1,000

PMT= 35

N= 60

I/Y= 4.15

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

The value obtained is 857.03.

Therefore, the current price of the bonds is $857.03,

Market value of equity= $37*3,000,000= $111,000,000.

Market value of debt= $857.03*110,000= $94,273,300.

Total firm value= $111,000,000 + $94,273,300

                               = $205,273,300.

Weight of debt in the capital structure=$94,273,300/ $205,273,300

                                                                          = 0.4593*100

                                                                          = 45.93.