In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation’s balance sheet as of today is as follows:
Long-term debt (bonds, at par) | $9,000,000 |
Preferred shares | 2,000,000 |
Common shares ($10 par) | 13,000,000 |
Retained earnings | 4,000,000 |
Total debt and equity | $28,000,000 |
The bonds have a 5% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 11 years from today. The yield to maturity is 14%, so the bonds now sell below par. What is the current market value of the firm’s debt?
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$6,076,050
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$6,300,485
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$6,529,120
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$6,750,510
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