Cost of common equity is already given: 15%
Before-tax cost of debt = 9%
After Tax Cost of Debt:
Where I = Interest (not rate, but amount)
Note that we do not take short-term debt to calculate cost of debt because it is not an element of capital.
Since the long term debt sells at par, its face value will also remain same.
Therefore, interest = $1,120 * 9% = $100.80
Therefore, After tax cost of debt =
or 6.75%
Now let us find the total value of firm so that we can calculate market weights.
Value of firm = Market value of common equity + Market value of long term debt
= (576 * $4) + $1,120
=$2,304 + $1,120
=$3,424
Now let us find the Market weights, i.e percentage of common equity and long term debt.
Percentage of common equity = $2,304/3424 = 0.6729 or 67.29%
Percentage of long term debt = $1,120/3424 = 0.3271 or 32.71%
WACC = (Percentage of long debt * cost of debt ) + (Percentage of common equity * cost of common equity)
= (32.71% * 6.75%) + (67.29% * 15%)
= 2.21% + 10.09%
= 12.30%
Therefore, WACC = 12.30%
The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 15%,...
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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 $1,185. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. 240 Assets Liabilities And Equity Cash $...
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 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 $1,143. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Assets Liabilities And Equity Cash $...
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 10%, 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 $1,137. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. The data has been collected in...
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...
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 $1,174. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Assets Liabilities And Equity Cash $ 120...