Question

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 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 $1,161. 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 51 Inventories 360 Long-term debt $1,110 Plant and equipment, net 2,160 Common equity 1,709 Total assets $2,880 Total liabilities and equity $2,880

Answer 1

WACC = Cost of Debt*Weight of Debt + Cost of Equity*Weight of Equity

Market value of debt = $1,161

Market value of Equity = 576*4 = $2,304

Hence, WACC using market value weights

= 10%(1-40%)*1,161/3,465 + 15%*2,304/3,465

= 11.98%