WACC Make sure to round to 2 decimal places The Patrick Company\'s year-end bala
ID: 2783517 • Letter: W
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WACC Make sure to round to 2 decimal places
The Patrick Company's year-end balance sheet is shown below. Its cost of common equity is 18%, 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 $1,115. 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 55 Inventories 360 Long-term debt $1,060 Plant and equipment, net 2,160 Common equity 1,755 Total assets $2,880 Total liabilities and equity $2,880Explanation / Answer
Market value of equity = Stock Price x No. of shares = 4 x 576 = 2,304
Market value of debt = 1,115
Total Value = 1115 + 2304 = 3419
=> WACC = wd x kd x (1 - tax) + we x ke
= 1115/3419 x 8% x (1 - 40%) + 2304/3419 x 18%
= 13.70%
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