Question

he Pawlson Company's year-end balance sheet is shown below. Its cost of common equity is 16%, its before-tax cost of debt is 12%, 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 $1,161. 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	1,110
Plant and equipment, net	2,160		Common equity	1,709
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

Pawlson’s Weighted Average Cost of Capital [WACC] using Market Value weight

Capital Structure	Market Value	Weight to Total market Value	Cost of Capital	WACC [WACC = Cost of Capital x Weight]
Long term Debt	$1,110	0.3203	7.20% [12% x (1 – 0.40)]	2.31%
Short Term Debt	$51 [$1,161 - $1,110]	0.0147	7.20% [12% x (1 – 0.40)]	0.10%
Common Equity	$2,304 [576 Shares x $4.00]	0.6650	16.00%	10.64%
TOTAL	$3,465	1.0000		13.05%

“Hence, the Pawlson’s WACC using Market Value weight = 13.05%”