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, January 1, 2003, 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 percent coupon rate, payable semiannually, and a par value of $1,000. They mature on January 1, 2013. The yield to maturity is 12 percent, so the bonds now sell below par. What is the current market value of the firm’s debt?
a. $5,412,000
b. $5,480,000
c. $2,531,000
d. $7,706,000
e. $7,056,000
Answer: A
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