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 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 $1,136 Plant and equipment, net 2,160
Common equity 1,744 Total assets $2,880
Total liabilities and equity $2,880

Explanation / Answer

Hi,

Please find the answer as follows:

Market Value of Equity = 576*4 = 2304 (Number of Shares*Current Selling Price)

Market Value of Debt = 1136

WACC = After Tax Cost of Debt*Weight of Debt + Cost of Equity*Weight of Equity = 11*(1-.40)*1136/(1136 + 2304) + 17*2304/(1136+2304) = 13.565 or 13.57%

Answer is 13.57%

Thanks.

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