EP-BY-STEP SOLUTION TO:

Question

16-4)
Here is Establishment Industries’ market-value balance sheet (Figures in

millions):

        Net working capital$490   Debt$850   Long-term assets 3,360   Equity 3,000     Value of firm$3,850  $3,850   

The debt is yielding 5.5%, and the cost of equity is 15.5%. The tax rate is 32%. Investors expect this level of debt to be permanent.

a.What is Establishment’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

  WACC %  

b.How would the market-value balance sheet change if Establishment retired all its debt? (Leave no cells blank – be certain to enter “0” wherever required. Do not round intermediate calculations. Round your answers to 1 decimal place.)

New Market-Value Balance Sheet

(figures in millions)  Net working capital$     Debt$     Long-term assets    Equity      Value of firm$     Total$  

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