CMS Corporations balance sheet as of today is as follows Lon

CMS Corporation\'s balance sheet as of today is as follows Long-term debt (bonds, at par) Preferred stock Common stock ($10 par) Retained earnings Total debt and equity $10,000,000 2,000,000 10,000,000 4,000,000 $26,000,000 The bonds have an 5.3% 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. $6,158,223 b. $6,158,870 c. $6,159,517 d. $6,157,576 e. $6,156,930

Solution

Facts Given:

Option D is correct : Current Market Value of Firm Debt= $ 6,157, 576
Facts Given:
Annual Coupon Rate (I):	5.30%
Semiannually Coupon Rate (I/2):	2.65%
Par Value of Bonds	$1,000
Period of Maturity(Yrs)	10 Years
Semiannually (Yrs*2)	20
Yield to Maturity (YTM)	12%
Discount Rate (YTM/2)	6%
Calculate the price of each bond:
Interest on bond	2.65%*1000=	$26.50
Face Value of Bond	$1,000
Market Value of each bond= 26.50/ 1.06 till 20 period + 1000/ (1.06) of 20th period
Market Value of each Bond = Cumulative PV of Interest + PV of Face/ Maturity Value
OR
Market Value of each bond= Interest/ (1+ Yield) till 20 period + Face Value / (1+ Yield) of 20th period
Market Value of each bond= 26.50/ 1.06 till 20 period + 1000/ (1.06) of 20th period
Market Value of each bond= 303.9529+311.8047
Market Value of each bond= 615.7576
No. of Bonds = Book Value of Bonds/ Par Value of each bond
No. of Bonds = 10,000,0000/ 1000
No. of Bonds = 10000
Current Maket Value of the Firm Debt(Bonds)= No. of Bonds * Market Value of each bond
Current Market Value of the Firm Debt (Bonds)= 10000*615.7576
Current Market Value of the Firm Debt (Bonds)= $6,157,576