The Market-value balance sheet and WACC calculation
Here is Establishment Industries’s market-value balance sheet (figures in millions)
Net working capital $ 550 Debt $ 800
Long-Term assets $2150 Equity $1900
Value of firm $2700 $2700
The debt is yielding 7 percent, and the cost of equity is 14 percent. The tax rate is 35 percent. Investors expect this level of debt to be permanent.
a. What is Establishment’s WACC?
b. assuming Establishment has no debt. Use your answer to Problem 4.