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 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 $1,201. 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	1,150
Plant and equipment, net	2,160		Common equity	1,669
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

Market Value of Debt = $1,201

Market Value of Equity = Number of shares outstanding * Market Price per share
Market Value of Equity = 576 * $4.00
Market Value of Equity = $2,304

Market Value of Firm = Market Value of Debt + Market Value of Equity
Market Value of Firm = $1,201 + $2,304
Market Value of Firm = $3,505

Weight of Debt = Market Value of Debt / Market Value of Firm
Weight of Debt = $1,201 / $3,505
Weight of Debt = 0.3427

Weight of Equity = Market Value of Equity / Market Value of Firm
Weight of Equity = $2,304 / $3,505
Weight of Equity = 0.6573

WACC = Weight of Debt * Before-tax Cost of Debt * (1 - tax) + Weight of Equity * Cost of Equity
WACC = 0.3427 * 10.00% * (1 - 0.40) + 0.6573 * 15.00%
WACC = 11.92%