Question: 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, 2005, 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, 2015. 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?