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

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
$1210
Plant and equipment, net
2160
Common equity
1670
Total assets
$2880
Total liabilities and equity
$2880

Explanation / Answer

otal market value of debt and equity -= V = 1130 (as we are told debt sells at par value) + (4 x 576) [ the value of the shares. V = 3434 WACC= [ (1130)/(3434) x (9% x (1-0.4) ) ] + [ (2304/ 3434) x 15% ] = 11.84%

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