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:.

.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

19

percent on its common​ stock, the​ firm's bonds command a yield to maturity of

8

​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

17

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

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

nothing ​%

​(Round to two decimal​ places.)

Data Table

Cash	$520,000
Accounts receivable	3,890,000
Inventories	6,600,000		Long-term debt	$9,710,000
Net property, plant, and equipment	18,622,000		Common equity	19,922,000
Total assets	$29,632,000		Total debt and equity	$29,632,000

Cash $520,000 Accounts receivable 3,890,000 Inventories 6,600,000 Long-term debt $9,710,000 Net property, plant, and equipment 18,622,000 Common equity 19,922,000 Total assets $29,632,000 Total debt and equity $29,632,000

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Answer 1

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