Crawford Enterprises is a publicly held company located in Arnold, Kansas. The f
ID: 2767331 • Letter: C
Question
Crawford Enterprises is a publicly held company located in Arnold, Kansas. The firm began as small tool and die shop but grew over it 35-year life to become a leading supplier of metal fabrication equipment used in the farm tractor industry. At the close of 2009 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 it common stock, the firm's bond command a yield to maturity of 7 What is Crawford's weighted average cost of capital?Explanation / Answer
Calculation of Weighted Average cost of Capital :
Formula :
Weighted Average cost of Capital = (Cost of Equity *weight of Equity ) +(Cost of debt * weight of debt)
Cost of Equity = 18%
Weight of Equity = Equity / Total assets = 20458000 / 30678000 = 0.6669
Cost of Debt = 7%
Weight of Debt = 1- weight of equity = 1-0.6669 = 0.3331
Hence ,
Weighted Average cost of Capital = (18% *0.6669) + (7%*0.3331) = 14.34%