(Solved by Humans)-A relatively young firm has capital components valued at book and
Question
A relatively young firm has capital components valued at book and market and market component
costs as follows. No new securities have been issued since the firm was originally capitalized.
??????????????????????????????????????? Values
Component?????? ?Market?????? Book???????????? Market Cost
Debt?????????????????? ?$42,830???????$40,000?????????? 8.5%
Preferred Stock $10,650?????? $10,000?????????? 10.6%
Common Equity $65,740????? $32,000??????????? 25.3%
Calculate the firm's capital structures and WACCs based on both book and market values, and
compare the two. What appears to have happened to interest rates since the company was started?
Does the firm seem to be successful?
Solution-
Interest rates have gone up; the firm is not successful.
Interest rates have gone down; the firm is successful.
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