In Order to Accurately Assess the Capital Structure of a Firm

question 10

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 January 1, 2010 is as follows: The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000.They mature on January 1, 2020.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

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Definitions:

Illegal Clause

A provision in a contract that is prohibited by law and therefore unenforceable.

Sever

To cut off or divide property interests or legal relationships.

Enforce

means to compel observance of or compliance with a law, rule, or obligation.

Statutorily Barred

A legal limitation preventing certain actions, typically due to the passage of time according to statutory law.