Problem 10-9 WACC The Patrick Company\'s year-end balance sheet is shown below.

Question

Problem 10-9
WACC

The Patrick Company's year-end balance sheet is shown below. Its cost of common equity is 14%, its before-tax cost of debt is 9%, and its marginal tax rate is 40%. Assume that the firm's long-term debt sells at par value. The firm’s total debt, which is the sum of the company’s short-term debt and long-term debt, equals $1,190. 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 payable and accruals $ 10 Accounts receivable 240 Short-term debt 40 Inventories 360 Long-term debt $1,150 Plant and equipment, net 2,160 Common equity 1,680 Total assets $2,880 Total liabilities and equity $2,880

Explanation / Answer

Equity Market value=576*$4.00=$2304.00

Debt=$1190.00

WACC=14%*(1190/3494)+9%*(1-.4)*(1190/3494)=11.07%

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