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 $1,185. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. 240 Assets Liabilities And Equity Cash $ 120 Accounts payable and accruals $10 Accounts receivable Short-term debt 45 Inventories 360 Long-term debt 1,140 Plant and equipment, net 2,160 Common equity 1,685 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

Total Market Value = Market Value of Debt + Market Value of Equity = $1,185 + $2,304 = $3,489

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

= [(1,185/2,304) * 8% * (1 - 0.25)] + [(2,304/3,489) * 16%]

= 2.04% + 10.57% = 12.60%