In Order to Accurately Assess the Capital Structure of a Firm,it

question 37

Multiple Choice

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 is as follows: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? $\begin{array}{l}\begin{array}{l}\text { Long-term debt (bonds, at par) } \\\text { Preferred stock } \\\text { Common stock ( } \$ 10 \text { par) } \\\text { Retained eamings }\\\text { Total debt and equity }\end{array}\begin{array}{r}\$ 10,000,000 \\2,000,000 \\10,000,000 \\\underline {4,000,000 }\\\$ 26,000,000\end{array}\end{array}$

• A)$5,276,731
• B)$5,412,032
• C)$5,547,332
• D)$7,706,000

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Definitions:

Illusion

A perception that misleadingly represents reality.

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In physics, the maximum extent of a vibration or oscillation, measured from the position of equilibrium.

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A subjective measure of the sound pressure level, perceived as the intensity or volume of a sound.

Sound Wave

A type of wave that is an audible vibration that travels through air or other media.