The Patrick Company\'s year-end balance sheet is shown below. Its cost of common
ID: 2672513 • Letter: T
Question
The Patrick Company's year-end balance sheet is shown below. Its cost of common equity is 15%, its before-tax cost of debt is 11%, and its marginal tax rate is 40%. Assume that the firm's long-term debt sells at par value. 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 receivable......... 240
Inventories..................... 360 Long-term debt $1,210
Plant and equipment, net.. 2,160 Common equity 1,670
Total assets.................. $2,880 Total liabilities and equity $2,880
_________%
Explanation / Answer
The Patrick Company's year-end balance sheet is shown below. Its cost of common equity is 15%, its before-tax cost of debt is 11%, and its marginal tax rate is 40%. Assume that the firm's long-term debt sells at par value. 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 receivable......... 240
Inventories..................... 360 Long-term debt $1,210
Plant and equipment, net.. 2,160 Common equity 1,670
Total assets.................. $2,880 Total liabilities and equity $2,880
WACC = (D/V) Cost of debt x(1-Taxes) + (E/V) Cost of equity.
V Is value of the firm = Market value of debt + Market value of equity.
=$1,210+1,670 =2880
D/V = $1,210 /$2,880=.4201=42.01%
E/V =$1,670 /$2,880=.5798=57.98%.
=40% x13% x (1-40%) +60% x 15%
=3.12% + 9 %
=12.12%. answer
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