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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.
 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 $0,000,000 Total liabilities and shareholders’ equity $139,000,000\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 \$ 15.25 per share, and its noncallable $1,000 \$ 1,000 par value, 20 -year, 7.25% 7.25 \% bonds with semiannual payments are selling for $875.00 \$ 875.00 . The betais 1.25 , the yield on a 6 -month Treasury bill is 3.50% 3.50 \% , and the yield on a 20 -year Treasury bond is 5.50% 5.50 \% . The required return on the stock market is 11.50% 11.50 \% , but the market has had an average annual retum of 14.50% 14.50 \% during the past 5 years. The firm's tax rate is 25% 25 \% .
-Refer to the data for the Collins Group.What is the best estimate of the after-tax cost of debt?


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Special Import Measures Act

Legislation aimed at providing protection to Canadian industries against unfair trade practices such as dumping and subsidization by foreign companies.

Subsidies

Financial support extended by the government to firms, businesses, or individuals, often aimed at promoting economic and social policy objectives.

Rules-of-Origin

Regulations determining the national source of a product, affecting the application of tariffs, trade policies, and free trade agreements.

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Special considerations, rights, or provisions under the North American Free Trade Agreement, particularly regarding trade and commerce among member countries.

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