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.

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

1. The Collins Group’s bond with $1,000 par value 20-year, 7.25% annual
coupon rate with semiannual coupon payment is selling or $875. What is the best estimate of the after-tax cost of debt if the firm’s tax rate is 40%?

a. 4.64%
b. 4.88%
c. 5.14%
d. 5.40%
e. 5.67%

2. The stock’s beta is 1.25, and the yield on a 20-year Treasury bond is 5.50%.
The required return on the stock market is 11.50%. Based on the CAPM,
what is the firm’s cost of common stock?

a. 11.15%
b. 11.73%
c. 12.35%
d. 13.00%
e. 13.65%

3. Which of the following is the best estimate for the weight of debt for use in calculating the firm’s WACC? The debt is selling for $875 per bond and the stock is selling or 15.25 per share

a. 18.67%
b. 19.60%
c. 20.58%
d. 21.61%
e. 22.69%

4. What is the best estimate of the firm’s WACC?

a. 10.85%
b. 11.19%
c. 11.53%
d. 11.88%
e. 12.24%