Question

​(Weighted average cost of capital​)

Crawford Enterprises is a publicly held company located in​ Arnold, Kansas. The firm began as a small tool and die shop but grew over its​ 35-year life to become a leading supplier of metal fabrication equipment used in the farm tractor industry. At the close of​ 2015, the​ firm's balance sheet appeared as​ follows:

Cash	$530,000
Accounts receivable	4,370,000
Inventories	6,800,000		Long-term debt	$10,400,000
Net property, plant, and equipment	18,123,000		Common equity	19,423,000
Total assets	$29,823,000		Total debt and equity	$29,823,000

.At present the​ firm's common stock is selling for a price equal to its book​ value, and the​ firm's bonds are selling at par.​ Crawford's managers estimate that the market requires a return of 17 percent on its common​ stock, the​ firm's bonds command a yield to maturity of 11 ​percent, and the firm faces a tax rate of 33 percent.

a. What is​ Crawford's weighted average cost of​ capital?

b. If​ Crawford's stock price were to rise such that it sold at 1.5 times book​ value, causing the cost of equity to fall to

15 ​percent, what would the​ firm's cost of capital be​ (assuming the cost of debt and tax rate do not​ change)?

NEED ANSWER ON THESE:

a. What is​ Crawford's weighted average cost of​ capital? _____​% ​(Round to two decimal​ places.)

b. If​ Crawford's stock price were to rise such that it sold at 1.5 times book​ value, causing the cost of equity to fall to 15

​percent, what would the​ firm's cost of capital be​ (assuming the cost of debt and tax rate do not​ change)? ______​% ​(Round to two decimal​ places.)

Answer 1

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