Exhibit 9.1 The Collins Group, a Leading Producer of Custom Automobile Accessories

question 71

Multiple Choice

Exhibit 9.1
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.

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 Exhibit 9.1.Which of the following is the best estimate for the weight of debt for use in calculating the firm's WACC?

• A) 18.67%
• B) 19.60%
• C) 20.58%
• D) 21.61%
• E) 22.69%

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Definitions:

Total Assets

The sum of all assets owned by a company, including both current and non-current assets.

Vertical Analysis

A method of financial statement analysis in which each entry is listed as a percentage of another item, frequently used to review relative sizes of account entries.

Total Assets

The sum of all resources owned by an entity, including cash, investments, property, and equipment, which are expected to provide future economic benefits.

Liabilities

The rights of creditors that represent debts of the business.