The Pawlson Companys yearend balance sheet is shown below It

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 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 $1,175. The firm has 576 shares of common stock outstanding that sell for $4.00 per share.

WACC The Pawson Company\'s year-end balance sheet is shown below. Its cost of common equity is 14%, 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 $1,175. 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 accrual Short-term debt Long-term debt Common equity Total liabilities and equity $ 10 Accounts receivable Inventories Plant and equipment, net Total assets 240 360 2,160 $2,880 45 1,130 1,695 $2,880 Calculate Pawlson\'s WACC using market-value weights. Round your answer to two decimal places. Do not round your intermediate calculations

Solution

Cost of Equity 14% Market value of Equity (\'E) (576*4) 2304 Before Tax Cost of Debt 12% Tax Rate 40% After Tax Cost of Debt= 12%*(1-0.4) = 0.072 or 7.2% Market Value of Debt (D) 1175 Total Equity and Debt (V)(2304+1175) 3479 WACC= Cost of Equity *E/V + After Tax cost of Debt * D/V = (0.14*2304/3479) + 0.072 * (1175/3479) = 0.1170 or 11.70%