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:

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 percent return on its common stock, the firm’s bonds command a yield to maturity of 8 percent, and the firm faces a tax rate of 21 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)?

c. Thought exercise. Crawford is considering a new business opportunity involving the acquisition of a trucking firm. What do you think the firm should do to select an appropriate cost of capital for evaluating this acquisition? No calculations required.

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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