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

Question

WACC 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 9%, 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 $1,174. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Assets Liabilities And Equity Cash Accounts payable and accruals Short-term debt Long-term debt Common equity Total liabilities and equity $ 120 $ 10 Accounts receivable Inventories Plant and equipment, net Total assets 240 360 2,160 $2,880 1,130 1,696 $2,880 Calculate Pawlson's WACC using market-value weights. Round your answer to two decimal places. Do not round your intermediate calculations. 12.94

Explanation / Answer

Market value of debt = Short term debt + long term debt = $1,174

Market value of equity = Number of shares outstanding*value of share = 576*4 = $2,304

Weight of debt = Market value of debt/(Market value of debt + Market value of equity) = 1174/(1174+2304) = 0.34

Weight of equity = Market value of equity/(Market value of debt + Market value of equity) = 2304/(1174+2304) = 0.66

Before tax Cost of debt = 9%

Cost of common equity = 16%

Marginal tax rate = 40%

WACC = we*re + wd*rd*(1-t), where we is weight of equity, re is cost of equity, wd is weight of debt, rd is before tax cost of debt and t is tax rate

WACC = (0.66*16) + (0.34*9*(1-0.4)) = 12.42%

So WACC using market weights = 12.42%

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