6. 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.

a. Calculate the firm’s capital structures and WACCs based on both book and market values, and compare the two.

b. What appears to have happened to interest rates since the company was started?

c. Does the firm seem to be successful? Why?

d. What should be the implication of using a WACC based on book as opposed to market values? In other words, what kind of mistakes might management make by using the book values?

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Value Component Market Book Cost Debt $42,830 $40,000 8.5% Preferred stock 10,650 10,000 10.6 Common equity 65,740 32,000 25.3