Collins Group
the Collins Group, a Leading Producer of Custom

question 39

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 balance sheet and some other information are provided below.
$\begin{array}{l}\text { Assets }\\\begin{array}{lr}\text { Current assets } & \$ 38,000,000 \\\text { Net plant, property, and equipment } & 101,000,000\\\text { Total assets }&\$ 139,000,000\\\\\text { Liabilities and Equity }\\\text { Accounts payable } & \$ 10,000,000 \\\text { Accruals } & 9,000,000 \\\text { Current liabilities } & \$ 19,000,000 \\\text { Long-term debt }(40,000 \text { bonds, } \$ 1,000 \text { par value) } & 40,000,000\\\text { Total liabilities }&\$ 59,000,000 \\\text { Common stock ( } 10,000,000 \text { shares) } & 30,000,000 \\\text { Retained earnings } & 50,000,000 \\ \text { Total shareholders' equity } & 80,000,000 \\\text { Total liabilities and shareholders' equity } & \$ 139,000,000\end{array}\end{array}$
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 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 40%.
-Refer to the data for the Collins Group. What is the best estimate of the after-tax cost of debt?

• A) 4.64%
• B) 4.88%
• C) 5.14%
• D) 5.40%
• E) 5.67%

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Definitions:

Consumption Bundle

A collection of goods or services that a consumer selects for purchase, representing a combination of different items that provide utility.

Income

The total money received by an individual or household from various sources, including wages, salaries, benefits, and investments.

Convex Preferences

In consumer theory, these are preferences where blends or combinations of two goods are preferred to extreme allocations, reflecting a desire for balance.

Indifference Curve

A graph representing different bundles of goods between which a consumer is indifferent, showing the combination of two goods that give the same level of satisfaction to the consumer.