Problem 1: 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
Problem 2: 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?
Problem 3: WACC AND PERCENTAGE OF DEBT FINANCING
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?