When the firm was first created four years ago it issued 100,000 shares at $20 per share. The book value of equity is $2,000,000. The shares currently sell for $40 per ,t *.. The market valueof the equity is the value of the shares at current prices, in other words $4,000,000. The firm also borrowed $10,000,000 at l0%. The l0-year bonds had

afacevalue of $1,000 and paid coupons semi-annually. It is now four years later and interest rates on this kind oibond have gone down to 8o/o. We can find the bond price using (n: Iy,pmt: 50, fu: 1,000, i:4) so the pv: 1,094. Since there are 10,000 bonds outstanding and each bond sells for $1,094, the total market value of debt is

$ 10,940,000.