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 9%, 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 $1,160. 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 60 Inventories 360 Long-term debt 1,100 Plant and equipment, net 2,160 Common equity 1,710 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.

WACC stands for Weighted Average Cost of Capital, which is defined as the computation of the cost of capital of the business in that every category of capital is weighted proportionately. All the sources of capital involving bonds, common stock, other long term debt and preferred stock are involved in computation of WACC. Computing WACC using the market value weights as: WACC = Market value of equity(Market value of equity + Debt value)×Cost of common equity +Debt value(Market value of equity + Debt value)×Before tax cost of debt ×1-Marginal tax rate where computing the market value of equity as: Market value of equity = Shares Outstanding ×Price per share=576 ×$4=$2,304 Debt value is $1,160 Cost of common equity is 14% Before tax cost of debt is 9% Marginal tax rate is 40% Putting the values above: WACC = $2,304($2,304 + $1,160)×14%+$1,160($2,304 +$1,160)×9% ×1-40%=$2,304$3,464×14% + $1,160$3,464×9% ×(0.6)=0.0931 + 0.0301 ×0.6=0.0931 + 0.01806=0.11116 or 11.12% Therefore, the WACC is 11.12%.

Answered: 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 9%, and its marginal tax rate is…

FINANCIAL ACCOUNTING

10th Edition

ISBN: 9781259964947

Author: Libby

Publisher: MCG

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Conversion cycle is also known as cash cycle or net operating cycle. Conversion cycle refers to how much time a company takes to turn its investments which is done from stock or any other financial resources into cash flows from sales.

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 9%, 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 $1,160. 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	60
Inventories	360		Long-term debt	1,100
Plant and equipment, net	2,160		Common equity	1,710
Total assets	$2,880		Total liabilities and equity	$2,880