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 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 $1,120. 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 | 60 | |
Inventories | 360 | Long-term debt | $1,060 | |
Plant and equipment, net | 2,160 | Common equity | 1,750 | |
Total assets | $2,880 | Total liabilities and equity | $2,880 |
The WACC is computed as shown below:
= cost of debt (1 - tax rate) x weight of debt + cost of equity x weight of equity
= 0.12 (1 - 0.40) x [ $ 1,120 / ( $ 1,120 + 576 x $ 4) ] + 0.18 x [ ( 576 x $ 4) / ( 576 x $ 4 + $ 1,120) ]
= 0.072 x $ 1,120 / $ 3,424 + 0.18 x $ 2,304 / $ 3,424
= 14.47% Approximately
Feel free to ask in case of any query relating to this question
The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 18%,...
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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...
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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 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...
8. 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 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 $1,160. 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 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 $1,108. 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 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 $1,169. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. The data has been collected in the...
The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 15%, 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 $1,128. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. The data has been collected in the...