Reference no: EM132489087

Collins Group

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

Point 1: 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%.

Question 1: Refer to the data for the Collins Group. Which of the following is the best estimate for the weight of debt for use in calculating the firm's WACC?

Option a. 22.69%

Option b. 20.58%

Option c. 19.60%

Option d. 18.67%

Option e. 21.61%