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​ 2015, the​ firm's balance sheet appeared as​ follows:

Cash	$420,000
Accounts receivable	5,350,000
Inventories	8,100,000		Long-term debt	$12,570,000
Net property, plant, and equipment	18,128,000		Common equity	19,428,000
Total assets	$31,998,000		Total debt and equity	$31,998,000

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 return of 17 percent on its common​ stock, the​ firm's bonds command a yield to maturity of 9 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 15 percent, what would the​ firm's cost of capital be​ (assuming the cost of debt and tax rate do not​ change)?

Answer 1

a)

D116 X ✓ fx =+C116/$C$121 D Market value capital structure 0.61 115 Cost % 17.00% Market value $ 19,428,000 WACC (Cost %xWeights) 10.32% $ 12,570,000 0.39 2.23% 116 Cost of equity 117 118 Debt (After tax cost) 119 120 121 122 5.67% =9%*(1-37%) Total $ 31,998,000 1.00 123 Weighted average cost of capital 12.55%

b)

D116 x V B fix =+C116/$C$122 C A E D Market value capital structure 0.70 Cost % 15.00% Market value $ 29,142,000 =19428000*1.5 WACC (Cost %Weights) 10.48% 115 116 Cost of equity 117 118 119 Debt (After tax cost) 120 121 122 123 $ 12,570,000 0.30 1.71% 5.67% =9%*(1-37%) Total $ 41,712,000 1.00 124 Weighted average cost of capital 12.19%

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