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 12%, 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 $1,151. 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	41
Inventories	360		Long-term debt	1,110
Plant and equipment, net	2,160		Common equity	1,719
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

Market Value of Equity = Share Price * Shares Outstanding = $4 * 576 = $2,304

Market Value of Debt = $1,151

Total Market Value = Market Value of Equity + Market Value of Debt

= $2,304 + $1,151 = $3,455

WACC = [wD * kD * (1 - t)] + [wE * kE]

= [(1,151/3,455) * 12% * (1 - 0.25)] + [(2,304/3,455) * 16%]

= 3% + 10.67% = 13.67%