Question

The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 17%, its before-tax cost of debt is 10%, and its marginal tax rate is 25%. 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 $1,095. 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	45
Inventories	360		Long-term debt	1,050
Plant and equipment, net	2,160		Common equity	1,775
Total assets	$2,880		Total liabilities and equity	$2,880

Calculate Paulson's WACC using market-value weights. Do not round intermediate calculations. Round your answer to two decimal places.

  %

Answer 1

WACC=(weight of debt*after tax cost of debt)+(weight of equity*cost of equity)

Cost of equity=17%

after tax cost of debt=before tax cost of debt*(1-tax rate)=10%*(1-25%)=7.5%

Market value of the debt=$1095

Market value of common equity=Outstanding shares*share price=576*4=$2304

Total value=1095+2304=3399

Weight of debt=Market value of debt/Total Value=$1095/3399=32.22%

Weight of Common equity=Market value of common equity/Total Value=$2304/$3399=67.78%

WACC=(32.22%*7.5%)+(67.78%*17%)=13.94%