The Paulson Company\'s year-end balance sheet is shown below. Its cost of common

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 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 $1,165. 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 Open spreadsheet 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 120 240 360 Plant and equipment, net 2,160 $2,880 Accounts payable and accruals Short-term debt Long-term debt Common equity Total liabilities and equity Cash $ 10 Accounts receivable $1,110 1,705 $2,880 Inventories Total assets

Explanation / Answer

Long-Term Debt Book Value = $ 1100, Since the long-term debt sells at par the market value of long-term debt is equal to its book value (balance sheet value) = $ 1100

Short-Term Debt = $ 55

Total Debt = D = $ 1165

Common Share Price = $ 4 and Number of shares outstanding = 576

Market value of common equity = E = 576 x 4 = $ 2304

Total Value = D + E = 1165 + 2304 = $ 3469

Debt Proportion = p(d) = 1165 / 3469 = 0.3358

Equity Proportion = p(e) = 0.6642

Before- Tax Cost of Debt = kd = 8 % and Cost of equity = ke = 16 %

Tax Rate = t = 40 %

WACC = kd x (1-t) x p(d) + ke x p(e) = 8 x (1-0.4) x 0.3358 + 16 x 0.6642 = 12.239 % or 12.24 % approximately.

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