#1 Excel Online Structured Activity: WACC The Paulson Company\'s year-end balanc
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Question
#1
Excel Online Structured Activity: WACC
The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 17%, its before-tax cost of debt is 12%, 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 $1,126. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.
Calculate Paulson's WACC using market-value weights. Round your answer to two decimal places. Do not round your intermediate calculations.
%
Assets Liabilities And Equity Cash $ 120 Accounts payable and accruals $ 10 Accounts receivable 240 Short-term debt 56 Inventories 360 Long-term debt $1,070 Plant and equipment, net 2,160 Common equity 1,744 Total assets $2,880 Total liabilities and equity $2,880Explanation / Answer
Answer)
WACC = Weight of debt* befor tax cost of debt*(1-tax rate) + weight of equity * cost of equity
Total equity = 576 x 4 = 2304
Weight of debt = 1126/(1126+2304) = 0.32828
Weight of equity = 2304 / (1126+2304) = 0.67172
After tax cost of debt = 0.12 * (1-0.40) = 0.072 or 7.2%
WACC = 0.12*(1-0.40)*0.32828 + 0.67172*0.17 = 0.137829 or 13.7829%
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