The Pawlson Company\'s year-end balance sheet is shown below. Its cost of common

Question

The Pawlson Company's year-end balance sheet is shown below. Its cost of common equity is 14%, its before-tax cost of debt is 11%, 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 $1,183. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Assets Liabilities And Equity Cash $ 120 Accounts payable and accruals $ 10 Accounts receivable 240 Short-term debt 63 Inventories 360 Long-term debt 1,120 Plant and equipment, net 2,160 Common equity 1,687 Total assets $2,880 Total liabilities and equity $2,880 Calculate Pawlson's WACC using market-value weights. Round your answer to two decimal places. Do not round your intermediate calculations.

Explanation / Answer

WACC = Weight of Debt * Cost of Debt * (1 - Tax Rate) + Weight of equity * Cost of Equity

Market value of long term debt = 1,120

Equity = 1,687

Value of the firm = 1,120 + 1,687

Value of the firm = 2,807

WACC = 1,120/2,807 * 11% * (1 - 40%) + 1,687/ 2,807 * 14%

WACC = 2.63% + 8.41%

WACC = 11.05%

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