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

Question

10-9 WACC The Patrick's Company's year-end balance sheet is shown below. Its cost of common equity is 16%, its before-tax cost of debit is 13%, and it marginal tax rate is 40%. Assume that the firms long term debt sells at par value. The firm has 576 shares of common stock outstanding to sell for $4.00 per share. Calculate Patrick's WACC using market value weights Assets Liability and Equity Cash - $130 Account payable and Accruals $10 Accounts receivable - 240 Short-term debt 52 Inventories – 360 Long-term 1,100 Plant and equipment net - 2,160 Common Equity 1,728 Total Assets - $2,890 Total liabilities and equity $2,890

Explanation / Answer

After-tax weighted portion of debt: 1162/2890 = 40.21 x (13% x (1-.40))= 40.21% x 7.8% = 3.14%

Add: weighted portion of common equity: 1728/2890 = 59.79% x 16% = 9.57%

WACC= 3.14% +9.57% = 11.71%

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