The Patrick Company\'s year-end balance sheet is shown below. Its cost of common

Question

The Patrick Company's year-end balance sheet is shown below. Its cost of common equity is 17%, its before-tax cost of debt is 10%, and its marginal tax rate is 40%. Assume that the firm's long-term debt sells at par value. 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.

Calculate Patrick's WACC using market value weights. Round your answer to two decimal places.

Assets Liabilities And Equity Cash $ 120 Accounts receivable 240 Inventories 360 Long-term debt $1,324 Plant and equipment, net 2,160 Common equity 1,556 Total assets $2,880 Total liabilities and equity $2,880

Explanation / Answer

For calculating WACC, weights are assigned on the basis of market value of capital components.

WACC = WEKE + KDWD

Where:

WE = Weight of equity

KE = Cost of equity

WD = Weight of debt

KD = After tax Cost of debt

In this question, total market value of firm = Market value of debt + Market value of equity

= $1324 + ($4 x 576)

= $1324 + $2304

= $3628

WE = 2304 / 3628 = 0.6351 or 63.51%

WD = 1

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