The Patrick Company\'s cost of common equity is 15%, its before-tax cost of debt

Question

The Patrick Company's cost of common equity is 15%, its before-tax cost of debt is 11%, and its marginal tax rate is 40%. The stock sells at book value. Using the balance sheet below, calculate Patrick's WACC. Round your answer to two decimal places.


Assets Liabilities And Equity

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Cash $???120
Accounts receivable 240
Inventories 360 Long-term debt $1,223
Plant and equipment, net 2,160 Common equity 1,657
Total assets $2,880 Total liabilities and equity $2880


%

Explanation / Answer

% Equity = 1,657/(1,657+1,223) = 57.5% % Debt = 1,223 / (1657+1223) = 42.5% WACC = %Equity * Cost of equity + %Debt * Pre-tax cost of debt * (1-tax rate) = 0.575 * 15 + 0.425 * 11 * (1-0.4) = 11.43%

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