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

Question

WACC 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 $1,176. 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 46 Inventories 360 Long-term debt $1,130 Plant and equipment, net 2,160 Common equity 1,694 Total assets $2,880 Total liabilities and equity $2,880

Explanation / Answer

Ans.

WACC = (D/V) Cost of debt*(1-Taxes) + (E/V) Cost of equity.V Is value of the firm = Market value of debt + Market value of equity.

WACC = 0.4 x 8% x (1 – 40%) + 0.6 x 17%

=3.2%x0.6%+10.2%

=1.92%+10.2%

WACC =12.12%.

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