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 6.5%, and the cost of equity is 14.5%. The tax rate is 31%. 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

1) WACC = wd(rd)(1 – T) + wc(rs) = (1050/3200)*6.5*(1-0.31)+(2150/3200)*14.5

=11.21%

2)

Debt =0

LTA = value of firm - Working capital

Net working capital 700   Debt 0   Long-term assets 1450   Equity 2150   Value of firm 2150   Total 2150

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