WACC The Patrick Company\'s year-end balance sheet is shown below. Its cost of c
ID: 2783501 • Letter: W
Question
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 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 $1,181. 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 41 Inventories 360 Long-term debt $1,140 Plant and equipment, net 2,160 Common equity 1,689 Total assets $2,880 Total liabilities and equity $2,880Explanation / Answer
Given, the firm's pretax cost of debt= 8%
Marginal Tax Rate = 40%
Total debt= $1,181
Market value of equity= $ 576*4 = $2,304
Cost of equity = 14%
We know WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]
E = Market value of the company's equity
D = Market value of the company's debt
V = Total Market Value of the company (E + D)
Re = Cost of Equity
Rd = Cost of Debt
T= Tax Rate
So, WACC = ((2,304/(2304+1181))*14%) + ((1181/(2304+1181))*8%*(1-0.4))
=0.093 + 0.016 = 0.109 or 10.9%
Therefore, the WACC is 10.9%.
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