Cost of common equity (rs) Before-tax cost of debt (rd) Marginal tax rate (T) Common shares outstanding Current stock price Long-term debt sells at par value Balance Sheet: Assets Cash Account receivable Inventories Plant and equipment, net Total assets Market value of total debt Market value of common equity Total capital Percentage of debt Percentage of common equity After-tax cost of debt Weighted Average Cost of Capital (WACC) 16.00% 10.00% 40.00% 576 $4.00 Yes $120.00 $240.00 $360.00 $2,160.00 $2,880.00 Liabilities and Equity Accounts payable and accruals Short-term debt Long-term debt Common equity Total liabilities and equity Formulas #N/A #N/A #N/A #N/A #N/A #N/A #N/A $10.00 $43.00 $1,150.00 $1,677.00 $2,880.00
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Excel Online Structured Activity: WACC
The Paulson Company's year-end balance sheet is shown below. Its
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 | 43 | |
| Inventories | 360 | Long-term debt | $1,150 | |
| Plant and equipment, net | 2,160 | Common equity | 1,677 | |
| Total assets | $2,880 | Total liabilities and equity | $2,880 |
fill in the blank 2%
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
