​(Weighted average cost of capital​) Crawford Enterprises is apublicly held company located in​ Arnold, Kansas. The firm began asa small tool and die shop but grew over its​ 35-year life to becomea leading supplier of metal fabrication equipment used in the farmtractor industry. At the close of​ 2015, the​firm's balance sheetappeared as​ follows:
Cash: 450,000
Accounts receivable: 4,250,000
Inventories: 8,400,000
Net property, plant, and equipment: 17,821,000
Total assets: 30,921,000
Long-term debt: 11,800,000
Common equity: 19,121,000
Total debt and equity: 30,921,000
.
At present the​ firm's common stock is selling for a price equalto its book​ value, and the​ firm's bonds are selling at par.​Crawford's managers estimate that the market requires a return of18 percent on its common​ stock, the​ firm's bonds command a yieldto maturity of 8 ​percent, and the firm faces a tax rate of 38percent.
a. What is​ Crawford's weighted average cost of​ capital?
b. If​ Crawford's stock price were to rise such that it sold at1.5 times book​ value, causing the cost of equity to fall to 16​percent, what would the​ firm's cost of capital be​ (assuming thecost of debt and tax rate do not​ change)?
