Question

WACC The Pawlson Company's year-end balance sheet is shown below. Its cost of common equity is 15%, its before-tax cost of debt is 8%, and its marginal tax rate is 40%. Assume that the firm's long-term debt sells at par value. The firm’s total debt, which is the sum of the company’s short-term debt and long-term debt, equals $1,090. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Assets Liabilities And Equity Cash $ 120 Accounts payable and accruals $ 10 Accounts receivable 240 Short-term debt 40 Inventories 360 Long-term debt 1,050 Plant and equipment, net 2,160 Common equity 1,780 Total assets $2,880 Total liabilities and equity $2,880 Calculate Pawlson's WACC using market-value weights. Round your answer to two decimal places. Do not round your intermediate calculations. %

Answer 1

MV of equity = price*number of shares = 576*4 = 2304

MV of equity + MV of debt = 2304+1090 = 3394

wt of debt = MV of debt/(MV of equity + MV of debt) = 1090/3394 = 0.3211

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 8*(1-0.4)

'= 4.8

Weight of equity = 1-D/A

Weight of equity = 1-0.3211

W(E)=0.6789

Weight of debt = D/A

Weight of debt = 0.3211

W(D)=0.3211

WACC=after tax cost of debt*W(D)+cost of equity*W(E)

WACC=4.8*0.3211+15*0.6789

WACC% = 11.72