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Weighted Average Cost of Capital (WACC) Questions

10- 9 WACC
The Patrick Company's cost of common equity is 16%, it's before-tax cost of debt is 13%, and its marginal tax rate is 40%. The stock sells at book value. Using the following balance sheet, calculate Patrick's WACC.

Assets Liabilities and Equity Cash $120
Accounts receivable 240
Inventories 360
Long- term debt $1,152
Plant and equipment, net 2,160
Common equity 1,728
Total assets $2,880
Total liabilities and equity $2,880

10- 10 WACC
Klose Outfitters Inc. believes that its optimal capital structure consists of 60% common equity and 40% debt, and its tax rate is 40%. Klose must raise additional capital to fund its upcoming expansion. The firm will have $2 million of new retained earnings with a cost of rs = 12%. New common stock in an amount up to $ 6 million would have a cost of re = 15%. Furthermore, Klose can raise up to $ 3 million of debt at an interest rate of rd = 10% and an additional $4 million of debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $5.9 million. What is the WACC for the last dollar raised to complete the expansion?

Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at rd = 11%, and its common stock currently pays a $2.00 dividend per share (D0 = $ 2.00). The stock's price is currently $24.75, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the company's capital structure consists of debt?

Solution Preview

(16%x 1728/2880) + [13% x (1 - 40%) x 1152/2880] = 12.72%

First, compute how the $5.9 million is to be raised.
60% equity = 5.9 x 60% = $3.54 million
40% ...

Solution Summary

The solution uses a provided balance sheet to calculate the weighted average cost of capital (WACC), as well as the WACC of the firms in situational expansions. The solution also looks at the percentage of a company's capital structure while factoring amounts of debt and common equity.