Question

The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 18%, its before-tax cost of debt is 9%, 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 $1,150. 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	60
Inventories	360		Long-term debt	1,090
Plant and equipment, net	2,160		Common equity	1,720
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

Value of equity =No of shares outstanding*share price =576*4 =2304

Value of debt =1150

Total value =2304+1150 =3454

After-tax cost of debt =9%*(1-25%) =6.75%

WACC=(2304/3454*18%)+(1150/3454*6.75%) =14.25%