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

Question

The Pawlson 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 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 $1,096. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Calculate Pawlson's WACC using market-value weights. Round your answer to two decimal places. Do not round your intermediate calculations.

Assets Liabilities    Liabilities And Equity

Cash $ 120                                                 Accounts payable and accruals $ 10

Accounts receivable 240                                   Short-term debt 46

Plant and equipment, net 2,160                        Inventories 360

Total assets $2,880                                            Long-term debt $1,050

                                                                         Common equity 1,774

                                                                    Total liabilities and equity $2,880

Explanation / Answer

WACC = D/(D+E) * Rd (1 - t) + E/ (D+E) * Re

D = Value of Debt = 1096

E = 576 * 4 = 2304

D+E = 1096+ 2304 =3400

Re = 16%

Rd = 10 (1- 0.40 ) = 6

WACC = 1096/3400 * 6 + 2304/3400 * 16 = 11.505%

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