Here is Establishment Industries’ market-value balance sheet (Figures in millions):

Here is Establishment Industries’ market-value balance sheet (Figures in millions):

Net working capital	$	600	Debt	$	1,000
Long-term assets		3,300	Equity		2,900
Value of firm	$	3,900		$	3,900

The debt is yielding 5.6%, and the cost of equity is 15.4%. The tax rate is 31%. Investors expect this level of debt to be permanent.

a.	What is Establishment’s WACC? (Do not round intermediate calculations. Round your answer 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	$

Explanation:

a.

b.

If the firm has no debt, the market value of the firm would decrease by the present value of the tax shield: 0.31 × $1,000 = $310.0.

The value of the firm would be $3,590.0. The long-term assets of the firm (which previously included the present value of the tax shield) will also decrease by $310.0.