Question

A firm currently has the following capital structure which it intends to maintain. Debt: $3,000,000 par value of 9% bonds outstanding with an annual before‐tax yield to maturity of 7.67% on a new issue. The bonds currently sell for $115 per $100 par value. Common stock: 46,000 shares outstanding currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends, which it expects to continue indefinitely. The firmʹs marginal tax rate is 40%. The company has no plans to issue new securities.

1- The current total value of the firm is:A) $6,450,000.B) $5,750,000.C) $4,950,000.D) $3,250,000.

Answer 1

Option (B) is correct.

Step-by-step explanation:

Value of debt:

= (Current selling price of bond ÷ par value) × Debt

= ($115 ÷ $100) × $3,000,000

= $3,450,000

Value of equity:

= common stock shares outstanding × Current selling price of common stock per share

= 46,000 × $50

= $2,300,000

Total value of the firm:

= Value of equity + Value of debt

= $2,300,000 + $3,450,000

= $5,750,000