Question

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 2019 the firm's balance sheet appeared as follows:

Cash	$540,000
Accounts Receivable	4,580,000
Inventories	7,400,000		Long-term debt	$12,590,000
Net Property, plant and equipment	18,955,000		Common equity	18,885,000
Total Assets	$31,475,000		Total debt and equity	$31,475,000

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 15% return on its common stock, the firm's bonds command 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?

PLEASE SHOW ALL WORK IN DETAIL WITH EXPLANATIONS. I AM REALLY STRUGGLING WITH THIS!

Answer 1

Weighted average cost of capital = After tax cost of debt*weight of debt + cost of equity*Weight of equity

=8%(1-34%)*12590,000/31475000 + 15%*18885000/31475000

= 11.112%

B.cost of capital = 8%(1-34%)*12590,000/(12590,000+18885000*1.5) + 13%*28327500/40917500

= 10.6246%