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 6.0%, and the cost of equity is 15.0%. The tax rate is 36%. 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

Part a. WACC = (Weight of Equity*Cost of Equity) + (Weight of Debt*After Tax Cost of Debt)

= [(2500/3900)*15] + [(1400/3900)*(6)*(0.64)]

= (0.64*15) + (0.36*3.84)

= (9.6) + (1.3824)

= 10.9824

WACC is 10.98%

Part b. Net Working Capital = (920)+(1400) = $2,320

Long term assets = (2980)-(1400) = $1,580

Value of firm = $3,900

Debt = (1400)-(1400) = $0

Equity = $2,500

Net Worth or Owners Equity(balancing figure) = $1,400

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