Question

The Pawlson Company's year-end balance sheet is shown below. Its cost of common equity is 18%, its before-tax cost of debt is 10%, 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 $1,181. 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	51
Inventories	360		Long-term debt	1,130
Plant and equipment, net	2,160		Common equity	1,689
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

Weighted Average Cost of Capital (WACC)

Capital Structure	Market Value	Weight to Total market Value	Cost of Capital	WACC
Long term Debt	$1,130	0.3242	6% [10% x (1 – 0.40)]	1.94%
Short Term Debt	$51 [$1,181 - $1,130]	0.0146	6% [10% x (1 – 0.40)]	0.09%
Common Equity	$2,304 [576 Shares x $4.00]	0.6612	18%	11.90%
TOTAL	$3,485	1.0000		13.93%

“Pawlson’s WACC using Market Value weight = 13.93%”