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 15%, its before-tax cost of debt is 11%, 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 $1,144. 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 And Equity Cash $ 120 Accounts payable and accruals $ 10 Accounts receivable 240 Short-term debt 54 Inventories 360 Long-term debt 1,090 Plant and equipment, net 2,160 Common equity 1,726 Total assets $2,880 Total liabilities and equity $2,880

Explanation / Answer

The cost of equity = Ke = 15%
And before tax cost of debt = 11%
Thus after tax cost of debt = Kd = debt*(1-tax) = 11*(1-0.4) = 11*0.6 = 6.6%


The value of debt = 1144
and value of equity = 576* 4 =2304
Thus,
weight of debt = Wd = 1144 / (1144+2304) = 1144 / 3448 = 0.33179
weight of equity = We = 1-Wd = 0.66821


WACC = We*Ke + Wd*Kd
=0.66821*0.15 + 0.33179*0.066
=0.1002315 + 0.021898
=0.12213
=12.213%

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