(Weighted average cost of capital ) Crawford Enterprises is a publicly held comp
ID: 2805105 • Letter: #
Question
(Weightedaverage 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 15
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 37 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)?
Cash: $ 520 000
Accounts Receivable 4,740,000
Inventory 6,700,000
Net Property and Plan 17,854,000
Total 29,814,00
Long Term Debt $ 10.660.000
Common Equity 19,154,000
Total Debt: 29,814,000
Explanation / Answer
Debt=10660000
Equity=19154000
Wt of debt=10660000/29814000
=35.76%
wt of equity=19154000/29814000
=64.24%
WACC=(wt of debt*after tax cost of debt)+(wt of equity*cost of equity)
=(35.76%*11%*(1-37%))+(64.24%*15%)
=12.11%
b)Debt=10660000
Equity=19154000*1.5=28731000
Wt of debt=10660000/(10660000+28731000)
=27.06%
wt of equity=28731000/(10660000+28731000)
=72.94%
WACC=(wt of debt*after tax cost of debt)+(wt of equity*cost of equity)
=(27.06%*11%*(1-37%))+(72.94%*13%)
=11.36%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.