This Question: 1 pt 2 of 5 This Quiz: 5 pts (Weighted average cost of capital) C

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This Question: 1 pt 2 of 5 This Quiz: 5 pts (Weighted average cost of capital) Cr 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 fim's balance sheet appeared as follows Enterprises is a publicly held company located in Arnold, Kansas. The firm began as a small tool and die shop but grew over At present the firm's common stock is selling for a price equal to its book value, and the fim's bonds are selling at par. Crawford's managers estimate that the market requires a return of 18 percent on its common stock, a. What is Crawford's b.If Crawford's stock price were to nse such that it sold at 1 firm's bonds command a yield to maturity of 11 percent, and the firm faces a tax rate of 32 percent. ed average cost of capital? to fall to 16 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.) b.If Crawford's stock price were to rise such that it sold at 1 (assuming the cost of debt and tax rate do not change)? 5 times book value, causing the cost of equity to fall to 16 percent, what would the firm's cost of capital be [1% (Round to two decimal places.) Data Table $ 540,000 3,630,000 Accounts receivable Inventories Net property, plant, and equipment Total assets 7800,000 Long-term debt Common equity 10,670,000 18,954,000 17,854,000 s 29,624,000 $ 29,624,000 Done

Explanation / Answer

We are given :

Cost of Equity = 18% ; Cost of debt = 11% , Tax rate = 32% ; Equity Value = 18,954,000 ; Debt Value = 10,670,000

Weightage of debt = 10670000/29624000 = 36.02% ; Weightage of equity = 63.98%

After tax cost of debt = 11% * (1-32%) = 7.48%

WACC = 36.02% * 7.48% + 63.98% * 18% = 14.21%

If the equity value increases by 1.5 times and cost of equity becomes 16%, then we have :

Total capital = 10670000 + 18954000*1.5 = 39,101,000

Weightage of debt = 10670000/39101000 = 27.29% ; Weightage of equity = 72.71%

WACC = 27.29% * 7.48% + 72.71% * 16% = 13.68%

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