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 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 $1,147. 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	47
Inventories	360		Long-term debt	1,100
Plant and equipment, net	2,160		Common equity	1,723
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 of equity*number of shares outstanding

MV of equity=4*576

=2304

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1147*1*1

=1147

MV of firm = MV of Equity + MV of Bond

=2304+1147

=3451

Weight of equity = MV of Equity/MV of firm

Weight of equity = 2304/3451

W(E)=0.6676

Weight of debt = MV of Bond/MV of firm

Weight of debt = 1147/3451

W(D)=0.3324

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*0.3324+15*0.6676

WACC =11.61%