Question

Collins Group The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets Current assets $ 38,000,000 Net plant, property, and equipment 101,000,000 Total assets $139,000,000 Liabilities and Equity Accounts payable $ 10,000,000 Accruals 9,000,000 Current liabilities $ 19,000,000 Long-term debt (40,000 bonds, $1,000 par value) 40,000,000 Total liabilities $ 59,000,000 Common stock (10,000,000 shares) 30,000,000 Retained earnings 50,000,000 Total shareholders' equity 80,000,000 Total liabilities and shareholders' equity $139,000,000 The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 25%. Refer to the data for the Collins Group. Which of the following is the best estimate for the weight of debt for use in calculating the firm's WACC? a. 19.60% b. 18.67% c. 22.69% d. 21.61% e. 20.58%

Answer 1

Answer: B.) 18.67%

Explanation:

WACC = Debt/(Depth +Equity)

Equity Details ;

Stock price = $15.25 per share

Total stock = 10,000,000

DEBT details :

Total bond = 40,000

Interest on bond = $875

WACC =(40,000×875) ÷ [(40,000 × 875)+(10, 000,000×15.25)]

WACC =[ 35,000,000 ÷ (35,000,000 +152500000) ]

WACC =35,000,000 ÷ 187500000

WACC = 0.18666666666666

WACC = 18.67%

Answer 2

Answer:

b. 18.67%

Explanation:

Weighted average cost of capital WACC determines firms cost of capital. It includes all sources of finance which are included in firm capital structure. The WACC is calculated with given formula:  

WACC = E/V Re + D/V * Rd (1 - T)

The cost of debt is estimated rate which a debt holder requires in order to lend funds. The formula to find cost of debt is

[Total interest expense (1 -Tax rate)] / Total amount of debt

[1,450,000 * 2 (1 - 25%)] / 40,000,000