In order to accurately assess the capital structure of a firm, it is necessary to convert its

balance sheet figures from historical book values to market values. KJM Corporation's
balance sheet (book values) as of today is as follows: Long-term debt (bonds, at par)
$23,500,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained
earnings 4,000,000 Total debt and equity $39,500,000 The bonds have a 7.0% coupon
rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from
today. The yield to maturity is 11%, so the bonds now sell below par. What is the current
market value of the firm's debt?

Since coupon payments are paid semiannually therefore coupon payments = 7%/2 =
3.5%

$1,000 x 3.5% = $35

Number of periods = 10 x 2 = 20 payments

YTM = 11%/2 = 5.5%

1
1-
Price = (1.055) 20 1
($35 � ) + ($1, 000 � )
0.055 (1.055) 20

= $760.991

Since the number of bonds = $23,500,000/$1,000 = 23,500 bonds

Total Value of the firm’s debt = 23,500 bonds x $760.991 = $17,883,320.23