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 15%, its before-tax cost of debt is 11%, 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.

Assets Liabilities And Equity
Cash $ 120
Accounts receivable 240
Inventories 360 Long-term debt $1,210
Plant and equipment, net 2,160 Common equity 1,670
Total assets $2,880 Total liabilities and equity $2,880


_________%

Explanation / Answer

The Patrick Company's year-end balance sheet is shown below. Its cost of common equity is 15%, its before-tax cost of debt is 11%, 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.

Assets Liabilities And Equity
Cash $ 120
Accounts receivable 240
Inventories 360 Long-term debt $1,210
Plant and equipment, net 2,160 Common equity 1,670
Total assets $2,880 Total liabilities and equity $2,880

WACC = (D/V) Cost of debt*(1-Taxes) + (E/V) Cost of equity.

V Is value of the firm = Market value of debt + Market value of equity.

= $1,152 + $1,1728= $2,880

D/V = $1,152/$2,880=40%

E/V =$1,1728/$2,880 =60%

WACC =40% x 13%*(1-40%) + 60%*16%

=0.4x 13%(0.6) + 0.6*16%
=3.12% + 9.6%
=12.72%.-------------WACC answer

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