Question

CMS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) $10,000,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $26,000,000 The bonds have a 4.0% 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? $5,276,731 $5,412,032 $5,547,332 $7,706,000 $7,898,650

Answer 1

the total value of the debt is $5412000

Step-by-step explanation:

semi annual interest = $1000*2%

= $20

period = semiannual = 10 years 10*2 = 20 semi-annual periods

YTM = 12% per annual = 6% semiannually

current market value of the debt = PV

= $20(PVIFA,6%,20) + $1000(PVIF,6%,20)

= $20*11.4699 + $1000*0.3118

= $541.20 per bond

since there are 10000 bonds outstanding, the total value of the debt is $541.20*10000 = $5412000