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 8%, 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 $1,206. 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 56 Inventories 360 Long-term debt $1,150 Plant and equipment, net 2,160 Common equity 1,664 Total assets $2,880 Total liabilities and equity $2,880

Explanation / Answer

Computation of Patrick's WACC using market value weight

Patrick's WACC = 0.12808 x 100 = 12.81%

Source of capital Market value Market value weights Specific cost of capital Weighted cost of capital Equity 2,304 0.65641 0.17 0.11159 Debt 1,206 0.34359 0.048 0.01649 3,510 1.00000 0.12808

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