Problem 10-9. Weighted average cost of capital The Patrick Company\'s cost of co

Question

Problem 10-9. Weighted average cost of capital

The Patrick Company's cost of common equity is 17%, its before-tax cost of debt is 11%, and its marginal tax rate is 40%. The stock sells at book value. Using the balance sheet below, calculate Patrick's WACC. Round your answer to two decimal places.

Assets Liabilities And Equity
Cash $???120
Accounts receivable 240
Inventories 360 Long-term debt $516
Plant and equipment, net 2,160 Common equity 2,364
Total assets $2,880 Total liabilities and equity $2880

%

Explanation / Answer

equity = 2364
assets = 2880
debt = assets - equity = 2880 - 2364 = 516

cost of equity = 17%
cost of debt = 11%
tax rate = 40%

WACC = [equity/assets]*cost of equity + [debt/assets]*cost of debt*(1-tax rate)
= (2364/2880)*17% + (516/2880)*11%*(1-40%)
= 13.95417% + 1.1825%
= 15.136667%
= 15.14% (rounded to 2 decimals)

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