er 10 Homework O10-1: An Overview of the Weighted Average Cost of Capital (WACC)

Question

er 10 Homework O10-1: An Overview of the Weighted Average Cost of Capital (WACC) 10-2: Basic Definitions ? WACC The Patrick Company's year-end balance sheet is shown below. Its cost of common equity 17%, 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, she t term debt and long term debt equals $1,144. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Calculate Patrick's WACC using market value weights. Round your answer to two decimal places. Problem Walk-Through Assets Liabilities And Equity $120Accounts payable and accruals Cash $ 10 Accounts receivable Inventories Plant and equipment, 240 Short-term debt 360 Long-term debt 2,100 Common equity 64 $1,080 1,726 net Total liabilities and equity $2,880 Total assets $2,880

Explanation / Answer

Equity market value= 576 shares* $4= $2304

Debt= $1144

WACC= (Weightequity * Return Equity) + (WeightDebt * Return Debt (1-Tax rate))

WACC= (2304/1144+2304 * .17)+( 1144/1144+2304 * .09(1-40%))

WACC= .11 + .02= .13 or 13%

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