Click here to read the eBook: An Overview of the weighted Average Cost of Capita

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Click here to read the eBook: An Overview of the weighted Average Cost of Capital (WACC) Click here to read the eBook: Basic Definitions WACC 8. 10. The Pawlson Company's year-end balance sheet is shown below. Its cost of common equity is 15%, its before-tax cost of debt is 8%, 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 $1,115. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. 12. Assets Liabilities And Equity 13. 14. 15. Cash 120 Accounts payable and $ 10 accruals Short-term debt Long-term debt Accounts receivable Inventories Plant and equipment, net 2,160Common equity Total assets 45 1,070 1,755 $2,880 240 16. 17 18. 19 20. 360 $2,880 Total liabilities and equity Calculate Pawlson's WACC using market-value weights. Round your answer to two decimal places. Do not round your intermediate calculations.

Explanation / Answer

Market Value of Debt = $1115

Market Value of Equity = 576 x 4 = $2304

Market Value weight of debt = $1115 / ($1115 + $2304) = 1115/ 3419

Market Value weight of equity = 2304 / 3419

Cost of equity = 15%

Post-tax cost of debt = Before tax cost of debt x (1 - tax rate) = 8% x (1 - 0.40) = 4.8%

WACC = Cost of equity x market value weight of equity + Post tax cost of debt x market value weight of debt

Or, WACC = (15% x 2304 / 3419) + (4.8% x 1115 / 3419) = 11.67%

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