WACC The Paulson Company's year-enu balance sheet is shown below. Its cost of com- mon equity is 14%, its before-tax cost of debt is 10%, 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 $1,167. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Calculate Paulson's WACC using market-value weights. Assets Liabilities and Equity Cash $ 120 Accounts payable and accruals $ 10 Accounts receivable 240 Short-term debt 47 Inventories 360 Long-term debt 1,120 Plant and equipment, net Common equity 2,160 $2,880 1,703 Total assets Total liabilities and equity $2,880
WACC The Paulson Company's year-enu balance sheet is shown below. Its cost of com- mon equity is 14%, its before-tax cost of debt is 10%, 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 $1,167. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Calculate Paulson's WACC using market-value weights. Assets Liabilities and Equity Cash $ 120 Accounts payable and accruals $ 10 Accounts receivable 240 Short-term debt 47 Inventories 360 Long-term debt 1,120 Plant and equipment, net Common equity 2,160 $2,880 1,703 Total assets Total liabilities and equity $2,880
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Concept explainers
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.
Question
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10-9 WACC The Paulson Company's year-enu balance sheet is shown below. Its cost of com-
2
mon equity is 14%, its before-tax cost of debt is 10%, 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 $1,167. The firm has
576 shares of common stock outstanding that sell for $4.00 per share. Calculate Paulson's
WACC using market-value weights.
HINT
3
MKT VALUE OF DEBT = 1167.
MKT VALUE OF COMMON STOCK IS 576 * $4.00 (not 1703)
TOTAL OF THESE TWO IS 100% OF THE "WEIGHTS"
6.
7
8.
Assets
Liabilities and Equity
9.
Cash
$ 120
Accounts payable and accruals
$ 10
10
Accounts receivable
240
Short-term debt
47
11
12
Inventories
360
Long-term debt
1,120
13
Plant and equipment, net
2,160
Common equity
1,703
14
Total assets
$2,880
Total liabilities and equity
$2,880
15
16
17
18
P.
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