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

Cash - $130

Accounts receivable - 240

Inventories – 360

Plant and equipment, net - 2,160

Total Assets - $2,890

Liability and Equity

Account payable and Accruals $10

Short-term debt                           52

Long-term                                   1,100

Common Equity                          1,728

Total liabilities and equity          $2,890

Explanation / Answer

Total debt = short term debt + long term debt

                  = $52 +$1,100

                  = $1,152

Cost of debt before tax = 13%

After tax cost of debt = 13% × (1 – 40%)

                                     = 7.8%

Value of equity = $1,728

Cost of equity = 16%.

Proportion of equity in capital structure = 60%

Proportion of debt in capital structure = 40%

Cost of equity = 16%

After tax Cost of debt = 7.8%

Now calculate WACC Patrick Inc. as calculated below:

WACC = 60% × 16% + 40% ×7.8%

             = 9.6% + 3.12%

             = 12.72%

Hence, WACC Patrick Inc. is 12.72%.

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