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. What is the best estimate of the after-tax cost of debt?