9-15. (Weighted average cost of capital) Crawford Enterprises is a publicly held
ID: 2792636 • Letter: 9
Question
9-15. (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 2009 the firm's balance sheet appeared as follows $ 540,000 4,580,000 7,400,000 Net property, plant, and equipment18,955,000 31475,000 Accounts receivable $12,590,000 18,885,000 31.475,000 Inventories Long-term debt Common equity Total debt and equity Total assets 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 15 percent return on its common stock, the firm's bonds command a yield to maturity of 8 percent, and the firm faces a tax rate of 34 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 13 percent, what would the firm's cost of capital be (assuming the cost of debt and tax rate do not change)?Explanation / Answer
1-
source
value
weight
cost of source
weight*cost of source
long term debt
12590000
0.4
5.28
2.112
equity
18885000
0.6
15
9
total
31475000
Weighted average cost of capital
sum of weight *cost of source
11.112
cost of debt
YTM*(1-tax rate)
8*(1-.34)
5.28
cost of equity
15
2-
source
value
weight
cost of source
weight*cost of source
long term debt
12590000
0.307692
5.28
1.624615
equity
28327500
0.692308
13
9
total
40917500
Weighted average cost of capital
sum of weight *cost of source
10.62462
cost of debt
YTM*(1-tax rate)
8*(1-.34)
5.28
cost of equity
13
1-
source
value
weight
cost of source
weight*cost of source
long term debt
12590000
0.4
5.28
2.112
equity
18885000
0.6
15
9
total
31475000
Weighted average cost of capital
sum of weight *cost of source
11.112
cost of debt
YTM*(1-tax rate)
8*(1-.34)
5.28
cost of equity
15
2-
source
value
weight
cost of source
weight*cost of source
long term debt
12590000
0.307692
5.28
1.624615
equity
28327500
0.692308
13
9
total
40917500
Weighted average cost of capital
sum of weight *cost of source
10.62462
cost of debt
YTM*(1-tax rate)
8*(1-.34)
5.28
cost of equity
13
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