Crawford Enterprises is a publicly held company located in A

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 18 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 16 ?percent, what would the? firm\'s cost of capital be? (assuming the cost of debt and tax rate do not? change)?

$ 570,000 Cash Accounts receivable Inventories Net property, plant, and equipment Total assets 5,430,000 Long-term debt Common equity Total debt and equity $ 11,800,000 19,251,000 $31,051,000 17,951,000 $31,051,000

Solution

A. WACC =Equity/(debt+equity)*cost of equity+debt/(debt+equity)*cost of debt*(1-tax rate)

= 19251,000/(19251000+11800000)*0.18+11800000/(19251000+11800000)*0.09*(1-0.37)

=13.31%

B. When market stock price is 1.5 times the book vlaue then

Market value of equity = 1.5 *19251000= $28876500

and new cost of equity = 16%

New WACC=

Equity/(debt+equity)*cost of equity+debt/(debt+equity)*cost of debt*(1-tax rate)

= 28876500/(28876500+11800000)*0.16+11800000/(28876500+11800000)*0.09*(1-0.37)

=13.00%