1. In order to accurately assess the capital structure of a firm, it is necessary...
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Accounting
1. 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. YRKF Corporation's balance sheet (book values) as of today is as follows:
Long-term debt (bonds, at par)
$60,000,000
Preferred stock
3,000,000
Common stock ($10 par)
10,000,000
Retained earnings
5,000,000
Total debt and equity
$78,000,000
The bonds have a 7.3% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 20 years from today. The yield to maturity is 9%, so the bonds now sell below par. What is the current market value of the firm's debt? (Hint: first calculate PV of bonds).
2. GYAO Inc.'s bonds currently sell for $1,275. They pay a $80 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,080. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)
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