A company\'s cost of common equity is 16%, its before-tax cost of debt is 13%, a

Question

A company's cost of common equity is 16%, its before-tax cost of debt is 13%, 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.

  The answer is 13.27%

However, I have 12.72%. My equation is WACC=(Market debt weight) x (After-tax cost of debt) + (Market equity weight) x (CAPM cost of Equity) for using market weight values. How do I add stocks into the equation?

Assets Liabilities & Equity Cash                                 $120 Accounts Receivables   $240 Inventories                     $360 Long-term Debt                       $1,152 Plant and Equip., net    $2,160 Common Equity                      $1,728 Total Assets                     $2, 880 Total Liabilities & Equity        $2,880

Explanation / Answer

market value of equity = 576 * 4 = 2304

market value of debt = 1152

total value = 3456

weight of equity = 2304/3456 = 2/3

weight of debt = 1152/3456 = 1/3

WACC = weight of equity * cost of equity + weight of debt * after tax cost of debt

= 2/3 * 16% + 1/3 * 13% * (1-0.4)

= 13.27%

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