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 6.6%, and the cost of equity is 14.4%. The tax rate is 30%. 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

Establishmnets WACC=

formula = Re*E/V+Rd(1-tax)D/V

Re = cost of equity Rd= cost of debt E= equity D= Debt V= value (Equity+Debt) T=tax

14.4%*2100/3100 + 6.6%(1-.30)1000/3100

0.0975+0.1039= 0.2014 or 20.14%

Debt Retirement *

note : source of funds to retire the debt is not given .assumed long term assets sold and retired the debt

Net Working Capital 670 Equity 2100

Long term assets 1430

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