WACC The Patrick Company\'s year-end balance sheet is shown below. Its cost of c
ID: 2705692 • Letter: W
Question
WACC
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 8%, 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.
%
Long-term debt $1,263
Plant and equipment, net 2,160 Common equity 1,617
Total assets $2,880 Total liabilities and equity$2,880
Explanation / Answer
Cost of debt = before tax cost of debt *(1-tax rate) = 8%*(1-40%) = 4.8%
Market value of debt = 1263
Market value of equity = 576*4 = 2304
Total assets = 1263+2304 = 3567
Weight of debt = debt/assets = 1263/3567 = 35.41%
Weight of equity = equity/assets = 2304/3567 = 64.59%
WACC = cost of debt * weight of debt + cost of equity * weight of equity = 4.8%*35.41% + 17%*64.59% = 12.68%
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