1. (Weighted average cost of capital) 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,"$560,000",,,

Accounts receivable,"4,120,000",,,

Inventories,"7,400,000",,Long-term debt,"$10,780,000"

"Net property, plant, and equipment","18,725,000",,Common equity,"20,025,000"

Total assets,"$30,805,000",,Total debt and equity,"$30,805,000"

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 16 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 14 percent, what would the firm's cost of capital be (assuming the cost of debt and tax rate do not change)?

a. What is Crawford's weighted average cost of capital? % (Round to two decimal places.) ANSWER:

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 14 percent, what would the firm's cost of capital be (assuming the cost of debt and tax rate do not change)? % (Round to two decimal places.) ANSWER:

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