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
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.
| 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% |
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 would be the implication of using a WACC based on book as opposed to market values? In
other words, what kinds of mistakes might management make by using the book values?
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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
