Here is Establishment Industries’ market-value balance sheet (Figures in million

Question

Here is Establishment Industries’ market-value balance sheet (Figures in millions):

The debt is yielding 6.2%, and the cost of equity is 14.8%. The tax rate is 34%. Investors expect this level of debt to be permanent.

What is Establishment’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

How would the market-value balance sheet change if Establishment retired all its debt? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 1 decimal place.)

Here is Establishment Industries’ market-value balance sheet (Figures in millions):

Explanation / Answer

a.Type of Capital Market value Weights Cost Weight*Cost Debt 1240 0.3444 0.04092 0.014095 Equity 2360 0.6556 0.148 0.097022 3600 1 0.111117 WACC 11.11% b.    If Establishment retired all its debt a.Type of Capital Market value Weights Cost Weight*Cost Equity 2360 1.0000 0.148 0.148 2360 1 0.148 WACC 14.80% Assets Liabilities   Long-term assets 2800 Current Liabilities 440   Equity 2360   Value of firm 2800 2800

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