Question

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 $1,121. 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 41 Inventories 360 Long-term debt 1,080 Plant and equipment, net 2,160 Common equity 1,749 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*shares = 4*576=2304

After tax rate = YTM * (1-Tax rate)

After tax rate = 10 * (1-0.4)

After tax rate = 6

Total Capital value = Value of Equity + Value of Debt

=2304+1121

=3425

Weight of Equity = Value of Equity/Total Capital Value

= 2304/3425

=0.6727

Weight of Debt = Value of Debt/Total Capital Value

= 1121/3425

=0.3273

After tax Cost of Capital = Weight of Equity*After tax Cost of Equity+Weight of Debt*After tax Cost of Debt

After tax Cost of Capital = 15*0.6727+6*0.3273

After tax Cost of Capital = 12.05