(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 dose 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 return of 18 percent on its common stock, the firm's bonds command a yield to maturity of 11 percent, and the firm faces a tax rate of 23 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 16 percent, what would the firm's cost of capital be (assuming the cost of c. Crawford is considering a new business opportunity involving the acquisition of a trucking firm. What do you think the fem should do to select an appropriate cost of capital for evaluating this acquisition? a. What is Crawford's weighted average cost of capital? % (Round to two decimal places.) 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 16 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.) c. If Crawford acquires the trucking firm, the appropriate cost of capital for evaluating this acquisition is the (1) cost of capital (Select from the drop-down menu.) (1) o company-wide divisional Screen Shot 2020-09-27 at 12.02.51 AM Q Search Data Table (Click on the following icon in order to copy its contents into a spreadsheet.) Cash $ 450,000 Accounts receivable 4,630,000 Inventories 7,400,000 Long-term debt Net property, plant, and equipment 17.739,000 Common equity $ 30,219,000 Total assets Total debt and equity $ 11,180,000 19,039,000 $ 30,219,000 Done Screen Shot 2020-09-27 at 12.01.34 AM Q Search (Cost of debt) Carraway Seed Company is issuing a $1,000 par value bond that pays 9 percent annual interest and matures in 14 years. Investors are willing to pay $980 for the bond. Flotation costs will be 14 percent of market value. The company is in a 30 percent tax bracket. What will be the firm's after-tax cost of debt on the bond? The firm's after-tax cost of debt on the bond will be %. (Round to two decimal places.) Continue Screen Shot 2020-09-27 at 12.01.34 AM Screen Shot 2020-09-27 at 12.02.14 AM Q Q Q Search (Divisional costs of capital and investment decisions) In May of this year, Newcastle Mfg. Company's capital investment review committee received two major investment proposals. One of the proposals was put forth by the firm's domestic manufacturing division, and the other came from the firm's distribution company. Both proposals promise a return on invested capital to approximately 11 percent. In the past, Newcastle has used a single firm-wide cost of capital to evaluate new investments. However, managers have long recognized that the manufacturing division is significantly more risky than the distribution division. In fact, comparable firms in the manufacturing division have equity betas of about 1.6, whereas distribution companies typically have equity betas of only 1.2. Given the size of the two proposals, Newcastle's management feels it can undertake only one, so it wants to be sure that it is taking on the more promising investment. Given the importance of getting the cost of capital estimate as close to correct as possible, the firm's chief financial officer has asked you to prepare cost of capital estimates for each of the two divisions. The requisite information needed to accomplish your task follows: The cost of debt financing is 8 percent before a marginal tax rate of 27 percent. You may assume this cost of debt is after any flotation costs the firm might incur. The risk-free rate of interest on long-term U.S. Treasury bonds is currently 5.4 percent, and the market-risk premium has averaged 3.7 percent over the past several years. . Both divisions adhere to target debt ratios of 30 percent. . The firm has sufficient internally generated funds such that no new stock will have to be sold to raise equity financing a. Estimate the divisional costs of capital for the manufacturing and distribution divisions. b. Which of the two projects should the firm undertake (assuming it cannot do both due to labor and other nonfinancial restraints )? Discuss. a. What is the divisional cost of capital for the manufacturing division? % (Round to two decimal places.) What is the divisional cost of capital for the distribution division? % (Round to two decimal places.) b. Which of the two projects should the firm undertake (assuming it cannot do both due to labor and other non financial restraints)? (Select the best choice below.) O A. Manufacturing project because the cost of capital is higher and thus the project's net present value (NPV) is higher. O B. Either project because their internal rates of return (IRR) are equal. OC. Manufacturing project because its divisional cost of capital is higher than that of distribution division OD. Distribution project because the cost of capital is lower and thus the project's net present value (NPV) is higher