Question

The Pawlson Company's year-end balance sheet is shown below. Its cost of common equity is 17%, 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 $1,174. 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	44
Inventories	360		Long-term debt	1,130
Plant and equipment, net	2,160		Common equity	1,696
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 stock = price*shares = 576*4=2304

Total Asset value = Value of Equity + Value of Debt

=2304+1174

=3478

Weight of Equity = Value of Equity/Total Asset Value

= 2304/3478

=0.6624

Weight of Debt = Value of Debt/Total Asset Value

= 1174/3478

=0.3376

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

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

= 4.8

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

WACC=4.8*0.3376+17*0.6624

WACC% = 12.88