Question

The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 15%, 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 $1,193. 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	63
Inventories	360		Long-term debt	1,130
Plant and equipment, net	2,160		Common equity	1,677
Total assets	$2,880		Total liabilities and equity	$2,880

Calculate Paulson's WACC using market-value weights. Do not round intermediate calculations. Round your answer to two decimal places.
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Answer 1

Market value of Equity = no. Of shares × market value

= 576 × 4

= $2,304

Market value Debt= 1,193

In case of debt, we will only take long term debt and not the short term debt when calculating WACC.

Total investment = market value of equity equity + market value of long term debt

= 2,304 + 1,130

= $3,434

Weight of equity= 2,304 / 3,434 = 0.6709

Weight of debt= 1,193 / 3,434 = 0.3291

WACC= weight of debt × cost of debt (1-tax rate) + weight of equity × cost of equity

= 0.3291 × 10% (1-0.4) + 0.6709 × 15%

= 0.3291 × 10% ( 0.6) + 10.06%

= 0.3291 × 6% + 10.06%

= 1.97% + 10.06%

= 12.03%