Collins Group
the Collins Group, a Leading Producer of Custom

question 87

Multiple Choice

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 bal ance sheet and some other in formation are provided below.
$\begin{array}{lr}\text { Assets } \\\text { Current assets } & \$ 38,000,000 \\\text { Net plant, property, and equipment } & 101,000,000 \\\text { Total assets } & \$ 139,000,000\\\\\text { Liabilities and Equity }\\\text { Accounts payable } & \$ 10,000,000 \\\text { Accruals } & 9,000,000 \\\text { Current liabilities } & \$ 19,000,000 \\\text { Long-term debt ( } 40,000 \text { bonds, } \$ 1,000 \text { par value) } & 40,000,000 \\\text { Total liabilities } & \$ 59,000,000 \\\text { Common stock (10,000,000 shares) } & 30,000,000 \\\text { Retained earnings } & 50,000,000 \\\text { Total shareholders' equity } & \$ 0,000,000 \\\text { Total liabilities and shareholders' equity } & \$ 139,000,000\end{array}$
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 betais 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 retum 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?

• A) 5.80%
• B) 6.10%
• C) 6.43%
• D) 6.75%
• E) 7.08%

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