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 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 $1,159. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.
Calculate Paulson's WACC using market-value weights. Round your answer to two decimal places. Do not round your intermediate calculations.
Assets | Liabilities And Equity | |||
Cash | $ 120 | Accounts payable and accruals | $ 10 | |
Accounts receivable | 240 | Short-term debt | 59 | |
Inventories | 360 | Long-term debt | $1,100 | |
Plant and equipment, net | 2,160 | Common equity | 1,711 | |
Total assets | $2,880 | Total liabilities and equity | $2,880 |
[_____] %
WACC = Cost of Debt*Weight of Debt + Cost of Equity*Weight of Equity
Market value of debt = $1,159
Market value of Equity = 576*4 = $2,304
% Debt = 1159/3463 = 0.3346809
% Equity = 0.665319
After tax cost of debt = 12%(1-40%) = 7.2%
Hence, WACC using market value weights
= 12%(1-40%)*0.3346809 + 17%*0.665319
= 13.72%
The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 17%,...
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