Question

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. Assets Current assets Net plant, property, and equipment Total assets $ 38,000,000 101,000,000 $139,000,000 Liabilities and Equity Accounts payable Accruals Current liabilities Long-term debt (40,000 bonds, $1,000 par value) Total liabilities Common stock (10,000,000 shares) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity $ 10,000,000 9,000,000 $ 19,000,000 40,000,000 $ 59,000,000 30,000,000 50,000,000 80,000,000 $139,000,000 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 25%. Refer to the data for the Collins Group. Based on the CAPM, what is the firm's cost of common stock? a. 13.00% b. 11.73% O c. 13.65% O d. 11.15% e. 12.35% Craig's Car Wash Inc. is considering a project that has the following cash flow and cost of capital (I) data. What is the project's discounted payback? r = 10.00% Year 0 1 2 3 Cash flows -$900 $500 $500 $500 O a. 2.29 years O b. 1.88 years O c. 2.78 years O d. 2.09 years e. 2.52 years Farmer Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. r 10.25% Year 0 2 3 CFs -$950 $500 $800 So CFL -$2,100 $400 $800 $800 $1,000 O a. $29.80 O b. $36.42 c. $33.11 ос O d. $24.14. O e. $26.82

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