Question

The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 16%, its before-tax cost of debt is 8%, 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 $1,108. 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	58
Inventories	360		Long-term debt	1,050
Plant and equipment, net	2,160		Common equity	1,762
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

MV of equity = price*shares = 4*576 = 2304

Total Capital value = Value of Debt + Value of Equity

=1108+2304

=3412

Weight of Debt = Value of Debt/Total Capital Value

= 1108/3412

=0.3247

Weight of equity = 1-D/A

Weight of equity = 1-0.3247

W(E)=0.6753

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

After tax cost of debt = 8*(1-0.25)

= 6

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

WACC=6*0.3247+16*0.6753

WACC =12.75%